Investors who dreamed of a record year for gold prices have had little to cheer about thus far in 2012.
After touching an all-time high of more than $1,920 US an ounce in September 2011, bullion has struggled to regain that lofty level since. Even after Monday’s surge of nearly $20 an ounce, gold is still about $190 or nearly 10 per cent below last year’s record peak.
Meanwhile, many leading gold stocks have taken a beating as rising costs, construction delays and operating snafus have hammered producers’ profit margins.
Another worry: China’s slowing economy has cut demand for most resources, including gold. And since China is the world’s second-largest gold consumer after India, this has also hurt prices.
Indeed, some analysts including Edward Morse, Citigroup’s global head of commodities research, insist that the so-called commodity super-cycle of the past decade is over. If so, that would curb demand for most resource products, including gold.
But John Ing, CEO of Toronto-based Maison Placements — a boutique investment dealer that specializes in commodities — doesn’t buy the bearish talk and he isn’t about to relinquish his status as one of Bay Street’s best-known gold perma-bulls.
With the so-called U.S. fiscal cliff and debt ceiling looming by year’s end, and with President Barack Obama back in the White House for four more years, Ing figures that spells more U.S. deficit spending. And as the $16.4 trillion U.S. federal debt continues to soar, Ing says that will spur fears of a sudden, sharp decline in the value of the greenback, which can only be positive for gold prices and gold stocks.
How positive? Ing says his previous forecast, which called for gold prices to eventually reach $3,000 an ounce, now looks too low.
“I think that’s wildly conservative, now that we have four more years of Obama,” says Ing, who sees gold prices approaching $2,200 an ounce in 2013, although he has yet to release a final estimate.
“In Obama’s first four years in office, he has tacked on more than $1 trillion a year in debt and that has caused a move up in all commodities. My expectation is that he’ll try more of the same medicine in his second term,” says Ing. “That means more deficit spending and it’s unsustainable. It’s just like a dam building up, and the dam is pretty full right now. So what we’re going to see, as a consequence not only of the last four years but the next few years, is a spike up in gold prices.”
Ing isn’t alone. Raymond Key, the London-based head of metals trading at Deutsche Bank, also believes gold prices are poised to reach record highs in 2013.
“We’ll take out $2,000, we’ll go higher,” Key recently told Bloomberg. “That’s on the view that they (central banks) will continue to print money.”
Investor interest in bullion — which remains on track for a 12th straight year of gains in 2012 even though gold has yet to regain the highs of a year ago — is also reflected in the popularity of gold-backed ETFs, exchange-traded funds that hold bullion.
“Gold out of all the metals will be the best performer,” Jeremy East, global head of metals trading and structured inventory product at Standard Chartered Plc, recently told Bloomberg.
While consumer demand for gold in key countries like India and China has fluctuated, central bank buying of bullion has increased, with nations like Brazil and Russia adding to their holdings.
Ing says he expects the Chinese central bank will want to dramatically boost its gold reserves as well, to diversify its holdings and reduce its exposure to the U.S. dollar.
“The Chinese have a little less than two per cent of their reserves in gold, but I think their central bank will want to get up to 10 per cent or thereabouts and that would require purchasing the next two years’ worth of western world production. So that’s an awful lot of gold,” he says.
Although China is currently the world’s top gold producer, its mines generally have limited reserves and short operating lives, says Ing. As a result, he expects Chinese companies to acquire assets abroad to boost their reserves, just as Chinese energy companies are already doing.
With the shares of many Western gold producers trading a low valuations, Ing says that could make some of them attractive takeover targets.