The MasterBlog: Citigroup metals analysts ask why gold is not already at $2,000/oz
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Friday, September 19, 2008

Citigroup metals analysts ask why gold is not already at $2,000/oz

Citigroup metals analysts ask why gold is not already at $2,000/oz

As the United States wades through a deep and murky morass of financial uncertainty and turmoil, Citigroup
suggests that gold is entering a powerful new investment demand phase tied to safe-haven and monetization.

Author: Dorothy Kosich
Posted:  Friday , 19 Sep 2008

Citigroup asserts that gold will benefit from both the "gloom & doom" and "muddle-through & monetization"
scenarios, possibly regaining $1,000 per ounce at year-end and even doubling or tripling in the long term.
"Frankly, we're surprised, that gold is not already at $2,000 an ounce," declared Citigroup analysts John H. Hill and
Graham Wark.

In an analysis published Wednesday, Hill and Wark suggested, "Gold appears to be entering a powerful new
phrase of investment demand tied to safe-haven and monetization themes."

"We have been surprised that gold has been so heretofore quiet, and have expected a much strong and more
immediate response to the government takeover of GSE [Government Sponsored Enterprises]/mortgage insurance
entities, and broker-deal bankruptcies," they wrote. "It is notable that hard-core goldbugs have been proven correct
in the decade-long contention that an overwhelmingly vast and complex pool of nested financial derivates would
ultimately result in cascading defaults and ruin for major portions of the banking system. Frankly, we're surprised
that gold is not already at $2,000 per ounce."

"Our sense is that gold has been temporarily depressed by a series of ephemeral, short-term trading dynamics that
served to mask strong physical off-take in what is ultimately a tiny market," the analysts said. "We continue to
regard as a barometer in the grand battle between hard assets and paper assets."

Benefiting in "Gloom & Doom" and "Muddle-through & Monetization" scenarios
Should the U.S. lapse into a deep recession that spills over to BRIC countries, Citigroup advises that "gold and
precious metals would prove to be one of the few safe havens for capital preservation particularly given likely low
to negative real interest rates in such a scenario. In this case we would expect gold to double or triple from more
current levels."

"A more likely macro outcome involves slow-growth accompanied by the monetization and socialization of
derivatives losses," the analysts said. "Actions such as the U.S. takeover of GSE/mortgage and insurance entities
and lending/guarantees to derivatives-laden banks, replicated globally, are likely to act to the detriment of paper
currencies relative to hard assets and gold."

Bullish on gold
"As we have maintained for months, gold seems to be badly mis-priced and uniformly dour sentiment for industrial
metals and coal," Hill and Wark said. "We remain positive on gold, based on a mix of macro and supply-demand

"The forces that have propelled gold for the past five years are firmly in place, and policy prescriptions for the credit
crisis seem powerfully and uniformly re-flationary. Prices are up in the Euro, Yen and Rupees, a crucial credibility
test. Gold is below constant-dollar peaks of $1,800-3,000/oz, and has lagged bulk/base metals since the 2001
trough. Appreciation remains muted relative to other metals and oil. Ultimately, gold is a small market with
motivated Indian/Asian and petrodollar-fuelled buyers."

The analysts forecast that the gold price will go higher through 2009-10 and maintain year-average forecasts of
$950/1,000 per ounce.

"Should the macro environment deteriorate more seriously than Citi economists expect, we would not be surprised
to see gold climb to multiples of these levels. In the near term, we expect gold to be highly sensitive to macro
developments, given the potential for safe-haven investment demand to ride on top of seasonal strength in
physical fabrication offtake."

Citigroup asserted that gold equities are mirroring investment in physical gold. However, the analysts observed that
gold mining shares are down 30% in the third quarter while gold bullion has only declined 7%.

Noting that gold equities remain near levels seen when gold prices were in the low $600s, Hill and Wark said,
"Lamentably, the equities have shown a strong beta to falling gold, and a weak beta to upside moves."

"Action in gold equities tends to mirror investment demand in bullion. Should retail investors return to gold, the
share should participate," they predicted, adding that gold stocks have seen "near-record volatility."

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