Gold price has room to move 10-15% higher
September 10, 2009

The gold price could strengthen a further 10% to 15% from current levels, Investec Asset Management said on Wednesday.

But the asset mangers believe investors stand to gain more through investments in gold equities than through gold exchange traded funds (ETFs).

"We believe it would not be unreasonable for gold to trade 10% to 15% higher from current levels, hitting the US$1,100 to $1,150/oz range," said Investec in a note.

The gold price marched through the $1,000 an ounce level on Tuesday on the back of a weaker dollar and hints of emerging hyperinflation.

Breaking through its February 2009 high with another $10 move, the precious yellow metal spiked at $1,007 ounce before trailing lower on Wednesday.

By 15.15pm gold was trading $1.30 short of the key level at $998.70.

"Triggered by the breach of key price levels and supported by good price momentum and improving moving averages, positions have probably been further accumulated by technical buying from system funds in the Comex gold futures market," said Investec.

It said a further catalyst for the $50/oz move upwards in gold, which has occurred over the last week, could include re-weighting from investments in other commodities, in particular the shift from energy into precious metals, which have lower costs of physical storage.

Platinum has also traded close to new 2009 highs, currently trading at $1,285/oz.

"The next key level for gold is the March 2008 high of $1,033/oz. We believe that gold may well continue to appreciate to new all-time nominal highs," said Investec.

Gold Exchange Traded Funds (which tend to be stickier) have also seen good gains over the past week after a long period of stagnation, adding over 500,000 ounces. They have now risen to above 50 million ounces.

"We believe that the combination of unprecedented global fiscal stimulus, quantitative easing, and increased money supply has the potential to result in broad currency devaluation, negative real interest rates and the return of high rates of inflation. We believe this points to a very supportive backdrop for gold to sustain moves above previous highs," said the asset managers.

But it warned that potential downside risks include selling in the physical market to test whether higher prices draw out further destocking, as we saw in the first half of this year.

"From an investment perspective, investors can access the gold market via Gold ETFs; however, we see more upside in gold equities.

Gold companies have seen costs stabilise, therefore an increasing gold price should lead to margin expansion for those companies with gold production growth, providing earnings growth and high cash flow yields," it said.

Gaining exposure via investment in a gold equity fund would be a good alternative to outright gold exposure, Investec suggested.