Most of the precious metals appear fairly straightforward (the picture doesn’t look too pretty for 2009) with one exception, gold. Now from a jewelry perspective, I’d always short gold (I personally am not a fan) but alas, that’s not the purpose of this analysis. Many of the major investment banks and research houses are bullish on gold, mostly due to gold serving as the safe haven asset in times of trouble. Banks like Citi predicted back in early December that gold would shoot to $2000/oz though we believe that prediction may be more based on Citi’s own precarious situation. Many are already saying that this recession is the worst since the end of WWII, and deeper than the recession of 1981-1982. But let’s take a look at a few of the key factors that impact gold prices.
For us at MetalMiner, we believe the factors influencing gold include the following: global interest rates, the value of the dollar, inflationary/deflationary cycles, industrial and jewelry demand and ETF investment. In support of gold prices, we have massive monetary stimulus and a lack of confidence in most global currencies. This is the safe haven argument. And in general, gold prices go up when interest rates go down and inflation increases. ETF’s also serve to boost gold prices. Prior to 2005, the dollar and gold traded in lockstep. But since 2005, gold has spiked even when the dollar has declined. So what is our call? We believe demand for jewelry will remain depressed as will industrial demand. Short term, deflation will be a bigger concern than inflation. However, inflation could become a big issue as soon as the economy picks up (perhaps in late 2009/2010). Global interest rates will continue to drop or be pushed lower to stimulate various economies. The dollar will likely remain “relatively” strong over the short term. The research firms believe ETF’s will overcome weak industrial demand pushing up prices. We tend to agree though we’ll temper our estimates with a lower average 2009 price because of deflationary concerns. So if Citi is at $2000, some of the analysts such as Morgan Stanley are at $900, we are slightly less enthusiastic putting our price estimates in the $800-900 range as the yearly average. Read more