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Citigroup says gold has one-in-four chance of spiking to US$2,500 per ounce

As gold achieves another record price, Citi reckons the chance of it spiking to US$2,500 an ounce has increased five-fold. The investment bank also highlighted Randgold Resources and African Barrick Gold as its top two picks in the gold mining sector
Citigroup says gold has one-in-four chance of spiking to US$2,500 per ounce

The ongoing rise in the price of gold has prompted Citigroup to speculate that gold has a one-in-four change of spiking to US$2,500 per ounce. Today, the surge in gold continued with the yellow metal striking a record US$1,888.90 an ounce.

Citigroup had previously considered that gold had a five per cent probability of achieving the US$2,500 per ounce target, but in a note published today the investment bank said it had increased its gold price estimates in order to accommodate the impact that global financial tension is having on the metal. “However, we expect those tensions and concerns to dissipate over time and do not believe that (price sensitive) jewellery demand will be able to make up for the loss of investment demand once sovereign financial tensions ease,” the banks’ analysts said.

Citi said its upside risk is based on the premise that global sovereign debt and global imbalances worsen in 2012, but then slowly improve after that.

The bank’s new forecasts were for US$1,590, US$1,650 and US$1,500 per ounce for 2011, 2012 and 2013 respectively. And despite its view that there is a one-in-four chance of gold spiking to US$2,500 per ounce, it does not expect gold to go higher than US$1,900 per ounce during the next three years.

As far as gold mining equities are concerned, Citi’s top two picks are Randgold Resources (LON:RRS) and African Barrick Gold (LON:ABG).

Citi pointed out that Randgold is a mid-cap miner that has the longest track record of all the UK gold miners and has the same chief executive officer as when it achieved its IPO in 1997. “The group’s knowledge of the geological structures in the areas in which it operates, surpasses, we believe, any of its UK peers, and probably most of its global peers,” said the bank.

The firm is set to deliver production growth of 150 per cent between 2010 and 2015. It has a strong reserve base and reserves “are likely to keep growing strongly”, it noted.

Meanwhile, its being active in four African countries offers some political risk diversification. “For example, during the recent Ivory Coast political problems... only 22 per cent of its net present value was at risk,” said the bank.

Citi estimates that Randgold will produce sales of US$1.2 billion this year, with a net income of US$428.1 million (translating to earnings per share of US$4.67).

African Barrick is set to enjoy an immediate benefit from the current high gold price, said Citi. “In this high gold price environment, we believe the best investments are in those groups already producing a high quantum of hold, not those who are still ramping up or still due to start construction,” it said. “At US$1,800 gold, African Barrick’s already-in-production status is what is needed and its low growth profile is now less of a negative.”

Citi forecasts African Barrick to generate revenues of US$1.3 billion this year, with pre-tax profit of US$524.1 million. Earnings per share are expected to come in at 87 cents.

Randgold was up 2.9 per cent at 6,800 pence at 1:30pm today, while African Barrick was up 2.7 per cent at 550 pence. Citi’s respective target prices for the shares are £86.78 and £7.90.


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