Merrill Lynch forecasts further upside for gold, silver prices for 2010-2012

Merrill Lynch upgrades gold and silver price forecasts, based on investor demand, central bank buying, and inflationary risks.

Author: Dorothy Kosich ] Mineweb.com
Posted:  Tuesday , 22 Jun 2010

RENO, NV –

Merrill Lynch metals analysts maintain gold will hit a US$1,500 per ounce target by the end of next year as investor demand pushes gold prices higher.

In research published Monday, analysts Michael Widmer, Francisco Blanch, and Alex Tonks are predicting average gold price forecasts of US$1,200/oz this year, $1,350/oz in 2011, and $1,400/oz in 2012, up from $1110/oz, $1179/oz and $1109/oz. respectively.

“We also believe that silver has further upside and see prices averaging $18/oz, $20.25/oz and $21/oz in 2010, 2011 and 2012 respectively,” they forecast.

“Our positive view on gold and silver prices is heavily influenced by the current macroeconomic environment and we believe that the following three developments will have a significant impact on these metals:

• “Central banks have eased monetary policy reflected in sharp rises of money supply;
• “Government debt has soared to make up for the private sector consumption short-fall;
• “Potential GDP growth rates have come under pressure.”

In their latest analysis, Merrill Lynch noted, “ETFs have been a decent proxy for the strength of retail investor demand and these vehicles have seen substantial inflows during the past years.” Recent data has shown that investors have once again started to increase their ETF holdings.

“It is also worth noting that investment demand in emerging markets like China has remained at very high levels,” the analysts said. “This is partially influenced by growing real incomes, the launch of gold investment products and some apprehension over the value of other investment alternatives, such as equity and property.”

“The importance of investors for the gold market will not change significantly in the coming years, in our view. Hence, we believe that a substantial part of marginal gold demand will continue to emanate from these market participants.”

The analysts also suggested the economic environment is bullish for gold as loose monetary policy tends to attract investors into gold. They asserted that concerns over inflation “could bring new buyers into the gold market in the medium-term.”

Meanwhile, although deflation is not normally viewed as bullish for gold, “we believe that the metal could rise on the back of it in the coming quarters,” they advised.

“Keeping in mind that recent rises in gold prices were almost exclusively driven by concerns over sovereign debt in the Eurozone, we especially believe that challenges to reduce public liabilities should bring new buyers into the gold market in the coming quarters,” they added. “There is also a risk that government may ultimately try to inflate debt away, which should attract gold buyers, too.”

Merrill Lynch-Australia analysts Stephen Gorenstein and Anthony Kuo said Tuesday that they believe continued macro uncertainty will drive investor demand for gold.

“We believe central banks may be net buyers of gold given concerns over valuations of their securities in their portfolios,” they suggested.

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