Sovereign debt worries here in Europe and in the US could push the gold price up to US$2,500 an ounce, and possibly even as high as US$5,000 ounce, according to research from Citigroup.
Today gold is changing hands at over US$1,600 an ounce as investors beat a retreat into a safe-haven “hard asset”.
And analyst Heath Jansen likens the current, seemingly inexorable rise of precious metal to the bull run of the 1970s and 1980s.
“When investors are hungry for gold, the metal has a habit of rising exponentially which has no parallel amongst metals,” he said in a note to clients.
“While base metals still have to adhere to some form of analysis along the lines of “supply less demand = inventory”, gold has decades of inventory lying in Central Banks and so that consideration doesn’t enter the equation, unless banks wish to sell that inventory.
“The last time they did that, and swapped their hard-asset gold for cash, it turned out to be the wrong option.
We do not believe that they will go that route in a hurry again. In fact, we believe it is that hard-lesson learned which makes them even more keen holders of gold and this has tightened up the market significantly.
“Added to that, equity investors nowadays often express dissatisfaction when gold companies hedge their gold and so that big negative, prominent in the nineties, has also been removed.
He singles out Randgold (LON:RRS) as its favoured equity play in the sector and jumps on the apparent disconnect between the lacklustre valuations of the miners and the precious metal’s sparkling performance on the commodities market.
“On a worst-case scenario for Euro sovereign debt and USA fiscal problems, we believe gold could repeat the extent of the 1970-1980 gold bull market, implying upside-risk to above $2500 an ounce,” Jansen added.
“A short-term (but not long lasting) large spike in gold is still possible in our view. We would now rate that probability as above 25 per cent, up from below 5 per cent just weeks ago (because of increased sovereign financial issues), and growing.”
This in turn ought to give a significant boost to the UK gold producers, which have underperformed the gold price and global gold equities.
The reason for this underperformance is put down to company-specific factors. For example, Randgold derives 20 per cent of its asset value from the Ivory Coast, which Jansen describes as a “tense political geography”.
Centamin (LON:CEY) and European Goldfields (LON:EGU) are discounted for the tough backdrop in Egypt and Greece respectively, while Tanzania is the major drag on African Barrick Gold (LON:ABG), he adds.
“These issues have contributed to the UK gold miners’ underperformance against the gold price and global gold equities,” Jansen explained.
“It also appears that investors do not view the current gold price as sustainable and are therefore not factoring current prices into the earnings estimates of the gold miners.
“However, based on the analysis presented in this note on the direction and magnitude of possible gold price movements, there could well be a swathe of earnings upgrades to come and a corresponding share price reaction, should gold prices maintain current strong levels or rise even further.”
Jansen even runs scenarios where the gold price could conceivably go to US$3,800 or US$5,000.
“It is difficult to argue that gold is going to $5,000 an ounce on the basis of equivalence with the seventies bull market. However the drivers are the same – the debasement of fiat currencies as a store of value and fear over the outlook for the global economy,” the analyst said.
“Given the historical role of gold as a storage of wealth, perceived devaluation in the purchasing power of fiat currencies translates into demand for the what is essentially the ultimate global reserve currency. It is not illogical then, to ask what conditions are needed to drive gold up to and even past this level.”
Citi’s is the latest in a long list of research which looks at the gold price and the underperformance of stocks in the sector.
Earlier this week, Investec’s Mark Heyhoe released ‘buy’ recommendations on a number of gold miners that have not been hitting the mark operationally, but are now expected to catch up.
They included Randgold, African Barrick Gold, European Goldfields and Centamin Egypt.
The analyst said: “We have a positive outlook on all companies, but stress that each company offers its own particular attraction to investors.”
Before that heavyweight Bank of America Merrill Lynch said it believes that bullion prices are sustainable between $1,500-2,000 an ounce in the medium term.
Like Investec, Merrill said there is ‘compelling scope’ for catch up trade for a number of gold plays.
Its favourite ‘buys’ are Centamin, Petropavlovsk (LON:POG), African Barrick, Randgold, and European Goldfields.
Ambrian Capital’s Duncan Hughes singles out Avocet Mining (LON:AVM) as his top pick in the gold sector.
Among the small-caps Archipelago Resources (LON:AR.), Condor Resources (LON:CNR), Hambledon Mining (LON:HMB), Mwana Africa (LON:MWA), Nyota Minerals (LON:NYO) and Vatukoula Gold Mines (LON:VGM), catch his eye.