Nov 20, 2008

CLSA on Gold

Interesting excerpt from a CLSA report on Gold..

CLSA
Gold : Dont Give Up Yet
End of decade target maintained at $ 2700 an ounce. The reversal of carry trade currencies - the Yen and the US Dollar is imparting near term strength to the Samurai and Greenback. The flight of the US Dollar and Jap Yen towards domestic shores should complete over the coming months.
 
This is when massive liquidity flows unleashed by Central Banks across the World will begin reflecting in weak Japanese and US currencies. While the current hoardes of Gold lie in vaults owned by Gold ETFs and many Central Banks, in future the Gold market which is presently occupied by reversals in the Value of "Bubble" Commodity currencies of Australia, New Zealand and Russia will have to contend only with Gold coming in from miners and not from the Hedge fund liquidation of Gold futures. Central Banks are likely to hold on to Gold Reserves for dear life, just as paper currencies continue to be debased.
 
CLSA continues to be asked a lot of questions about Gold in the context of the continuing correction in the oil-led commodity complex and the continuing US Dollar rally. 
 
The key point is that investors should not give up on Gold. It is natural that Gold should have participated in the recent oil-led commodity correction since most investors just assume it is only an inflation hedge. This is fundamentally wrong. Gold is a currency, and a hedge against both inflation and deflation since it is the only financial asset that is not part of the contaminated credit system.
 
This is why Gold will rally again in US dollar terms when the markets start to discount renewed Fed easing, as they have begun to do. And the more the US Dollar rallies, the more comfortable Billy Boy Ben will feel about cutting rates again. 
 
But the key point for investors to note when Gold starts to rally again is that, it will in the next bull upmove outperform dramatically oil and other economically sensitive commodities.
 
This is important since in its recent parabolic spike Oil reached an unprecedented premium valuation over Gold. Thus, Gold/Oil price collapsed from 12.4 in January 2007 to a near record low of 6.35 in June 2008 and is now 8.9.
 
This is why Gold is now set to Outperform Oil dramatically from here. It is also why Gold stocks are now very attractive since a major negative for Gold mining stock's profit margin has been rising energy costs.
 
But the key point to remember is that Gold is a currency and not just an "inflation hedge". CLSA recommends a 30 per cent allocation to Gold and Gold miners for Long Only US dollar denominated pension funds.

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