Canaccord Raises Gold & Silver Forecast (Both Peak & Earnings)
This week ending July 29, 2011 -- Broker-Dealer Canaccord continues to believe that macro-economic conditions favour higher gold and silver prices, including record global liquidity, inflation prospects, and low real interest rates, currency debasement on sovereign debt woes in Europe and potentially the US. The recent negative outlook on US credit by S&P (April 18, 2011) and Moody’s (July 13, 2011) coupled with higher inflation readings have been the catalysts to move gold through our previous peak of $1,600/oz. Excerpts and highlights from Canaccords new outlook:
“We are revising our peak gold/silver scenario to $1,750/$45.00 from $1,600/$47.50 for equity target price setting. For earnings purposes, we are also revising our gold/silver price forecasts to $1,575/$39 (from $1,525/$42) in 2011, $1,650/$41 (from $1,525/$41) in 2012, and to $1,100/$22 (from $1,000/$20) in 2017 and beyond.”
Massive global government stimulus efforts have led to a large increase in global US dollar liquidity to approximately $10 trillion
“We expect the trend to continue We believe a key factor behind the rise in gold prices over the past several years has been the massive increase in US dollar global liquidity. In November 2011, the US Federal Reserve announced QE2, a $600 billion additional stimulus package (which ended as of June 30, 2011), the effect of which we are seeing in the abrupt rise in the US-adjusted monetary base. This has resulted in a material increase in global US dollar liquidity over the last few years. Since mid-2000, gold’s correlation to global US dollar liquidity (Figure 5) has been almost perfect. We estimate that in the 12 months ending June 30, 2011, global US dollar liquidity increased by approximately $1.3 trillion accompanied by a gold price increase of $320/oz. Despite massive government stimulus efforts, the global economic recovery has been materially slower-than-anticipated, which could prompt the call for additional stimulus. We estimate that approximately $1 trillion in additional US$ liquidity could potentially add another $155/oz to the gold price.”
Global sovereign credit quality woes support further increase in gold investment:
“Sovereign credit quality continues to make headlines as various European countries find difficulty in financing their debt. Greece recently averted a default by agreeing to austerity measures required to secure foreign bailout funds (including a roll-over of bonds already held). Ratings agency Moody’s downgraded Portugal’s debt to “junk” status (“Ba2”) on July 5, 2011, reasoning that Portugal may need a second round of rescue funds. Italy, Europe’s third-largest economy, and Spain have come under market pressure as their government bond yields have hit their highest levels in 14 years. Moody’s also cut Ireland’s debt to junk status (“Ba1”) on July 12. In North America, the US government’s debt level has reached its $14.29-billion ceiling. Congress is under pressure to pass legislation by August 2, 2011 that would raise the debt ceiling. A delay in the legislation could potentially result in the US government defaulting on debt repayment: on August 4, 2011, the US Treasury must pay off $30-billion in maturing short-term debt. Based on recent lackluster US economic indicators and the potential credit default in the country, ratings agencies have warned of US debt risks being downgraded: S&P on April 18, 2011 and Moody’s on July 12, 2011. These factors have contributed to put renewed downward pressure on the US dollar, which we believe will continue to have positive implications on the gold price going forward.”
Inflation pressures increasing while governments keep brakes on interest rates…really good for gold
“We believe some explanation for gold’s upward momentum comes from observing inflation expectations, where the two-year expected inflation rate now stands at 1.6% (Figure 6). But more importantly, because governments cannot afford to raise rates which would threaten the fragile global economic recovery, real rates are negative. This makes for an easy case for holding gold as an inflation hedge with no opportunity cost.
Key demand countries: CPI data supports gold investment
“Our analysis of CPI numbers in China and India (Figure 7) highlight the likelihood of continuing future demand for gold in those countries as an investment vehicle. In India, the CPI is 9.4% (April 30, 2011): while on a downward trend, it is still higher than the average of 6.2% since the beginning of 2000. As prices continue to soar, we believe investors should continue to be drawn to gold as a haven and we expect demand to remain strong. China’s CPI is on an upward trend: increasing from -2% on July 31, 2009 to 5.3% at the end of April, 2011. China’s response to this inflation pressure has been to continue to cool lending by increasing banks’ reserve ratios. Chinese investors have turned to gold and silver as inflation protected investments, and we see this trend continuing.”
ATTRACTIVE SEASON TO HOLD GOLD…RESPECTING POTENTIAL FOR OCTOBER WEAKNESS
“We see the September – January season as historically strong (20 years of data) for precious metals prices. In particular, September has proven to be the strongest month of the year. But, history would suggest there is a potential for an October pullback before the momentum typically returns in November - January (Figure 8). When examining performance over the past 20 years, holding gold in the first half of the year would yield a return of approximately 1%, while holding gold in the second half of the year would, on average, yield approximately 5.7%. July and August have been historically flat performers for gold bullion with the second half of the year returns beginning in September. Historical monthly returns for the HUI Index since 1995 would also suggest that the second half of the year is strong for equities, indicating that holding equities from August to the end of the year would on average yield an investor an 8.8% return.”
End of excerpts.
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