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by Jennifer Robinson | FTMDaily Staff Writer
HOUSTON, JUNE 15
Standard Chartered published a report on gold yesterday that explained several factors that they believe could drive the price of gold to $5,000/oz. The report based its prediction on three factors:
– Limited gold production
– Buying by central banks
– Increasing demand by India and China
All three of these factors could potentially drive the price of gold to $5,000. Of course, other factors – such as investor sentiment, political action, competition from gold stocks, and others – play a role in the price of gold in today’s market. However, simple economics tells us that a slowdown in supply, coupled with an increase in demand drives up the price of any good.
Here is an excerpt from the Standard Chartered report on gold:
We are bullish on gold. Most market commentary on gold has centered on the direction of US dollar movements or inflation/deflation issues. We go beyond this to examine future mine supply, which we think is just as important a driver. Our comprehensive study of 375 gold projects supply suggests a very limited production growth profile for the next five years. A ten-year bull market in gold has done little to drive gold production. The gold miners are running to stand still. A lack of funding from equity markets and a shortage of large gold mines makes it difficult for the industry to compensate for the depletion caused by aging mines and falling grades. In our base case, our 375-mine supply model shows net production growth of 3.6% pa. over the next five years.
The limited supply comes at a time when central banks have completely changed their tune on selling down their gold stocks and now appear likely to accelerate their net buying programmes. China is way behind the curve. Currently, only 1.8% of China's foreign exchange reserves is in gold; if the country were to bring this proportion in line with the global average of 11%, it would have to buy 6,000 more tonnes of gold, equivalent to more than 2 years of gold production.
We believe that these factors – limited gold production, buying by central banks and increasing demand from India and China – can potentially drive the gold price to US$5,000/oz…
We believe the best ways to invest in the gold cycle are buying physical gold (a safe asset) or investing in junior gold miners (highest leverage to the gold price) that are 1-2 years away from production. We are cautious about the gold majors. Project plans of the big five gold producers by market cap suggest an average production CAGR of only 4% in the next five years. They need to depend on expensive acquisitions in order to grow further. As a form of affirmation, the share price index we constructed for the gold majors underperformed the gold price by 147ppt over 1995-2011.
This report highlights three factors that could potentially drive the price of gold to historically high prices. The report was released amid a sea of gold news, including the latest CFTC data, stating that ETF gold holdings increased by 10.7 tons over the week ended June 10, showing evidence that investor interest in gold is continually growing.
The question on every investor’s mind is: When should we expect to see gold hit $5,000? Well, no one really knows with any certainty. However, our team does expect gold prices to be up during Q4 of 2011. Over the past decade, the fourth quarter has seen gold going higher on a very consistent basis.
Here at FTMDaily, our investment philosophy has changed little over the last several years. We hold to a philosophy called P.A.C.E., which includes precious metals (P.A.C.E. stands for Precious metals, Agricultural Commodities, and Energy). We believe that precious metals are a wise investment for those investors seeking inflation protection.
We agree with Standard’s report that one of the best ways to invest in the gold bull market is by purchasing physical gold. To learn more about our investment philosophy, and to see how gold fits into it, check out the FTM Quarterly Newsletter (you will receive full access to the FTM Investment Portfolio as a subscriber).
You can also get weekly Precious Metals Market updates on our radio show. Listen to the latest audio report, and sign up for email news updates on precious metals here.
In The News Today…
1. MARKET WATCH: A violent protest against the Greek government's latest austerity package hit stocks hard Wednesday and sent the euro sliding over a percent against the dollar. Stocks saw a broad selloff Wednesday, with the Dow plunging more than 150 points, amid worries over the exacerbating euro zone debt situation and following a handful of weaker-than-expected economic news. The Dow Jones Industrial Average plunged to trade below the psychologically-important 12,000 mark, after posting its biggest gain in almost two months during the previous session.
2. LAWMAKERS TO SUE OBAMA OVER LIBYA: As the White House is set to issue a much-anticipated report to Congress on Wednesday justifying the military action in Libya, a bipartisan group of House members, led by Rep. Dennis Kucinich (D-Ohio), announced that it is filing a lawsuit charging that President Obama made an illegal end-run around Congress when he approved U.S military action against Libya. According to Kucinich, the suit will challenge the Obama administration’s “circumvention of Congress and its use of international organizations such as the United Nations and the North Atlantic Treaty Organization to authorize the use of military force abroad.”
3. WEB IPO SOARS: The shares of popular but unprofitable Internet radio service Pandora Media Inc. soared more than 50 percent in its market debut Wednesday, adding to the IPO frenzy that has some watchers talking tech bubble. The Pandora IPO comes on the heels of the recent Linkedin IPO. Daily deals site Groupon Inc. has also filed to go public but no details are available yet. The frothy prices are reminiscent of the late 90's dot-com craze.
4. U.S. HOUSING CRISIS: The housing crisis that began in 2006 is now worse than the meltdown in the Great Depression, with home prices having fallen 33 percent since then compared to 31 percent in the 1920s and 1930s, according to data from Case-Shiller, which tracks the sector.
5. INFLATION UPDATE: The cost of living in the U.S. rose more than forecast in May reflecting higher prices for everything from autos to hotel rooms, signaling raw-material expenses are filtering through to other goods and services. The so-called core measure, which excludes more volatile food and energy costs, climbed 0.3 percent, the biggest increase since July 2008.