Mining News: Some money moving out of gold and back to equities

Although the overall outlook for gold prices and demand remains positive, there may be some "fault lines" emerging in the picture, JP Morgan metals strategist Michael Jansen said in Toronto on Sunday.

 

JP Morgan is forecasting an average gold price of $1 465/oz this year, and has a year-end target of $1 500/oz.

 

"We think the physical demand from Asia in particular, particularly from China and India, will continue to underpin the gold market outlook," Jansen told a full house on the first day of this year's annual Prospectors and Developers Association of Canada (PDAC) convention.

 

"(But) we are a little bit concerned about the signs of some fault lines emerging in the market."

 

For one thing, there has been a shift by wholesale investors and some funds out of gold and back into equities, which now "look quite cheap" compared with the yellow metal, he said.

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Investment demand has been the reason for gold's rise to record highs in recent years, as investors are lured by the metal's role as a hedge against inflation, a haven from risk and as a story of value.

 

"We have received a lot of feedback at at the significant wholesale investor level, or the big macro funds, they are generally starting to pull back their exposure to gold and get more exposure towards equities," Jansen said.

 

"We see equities emerging from a multi-year funk and moving into a two or three year bull market. And that obviously reduces the need for a portfolio hedge like gold."

 

So far, the effects on the gold price have been limited because physical demand by retail investors and from China and India in particular has offset the investment shift, Jansen said.

 

The outlook for gold mine supply, which had declined for several years until an uptick in 2009 was followed by a record production year in 2010, is also "quite strong", he commented.

 

JP Morgan expects that gold mine supply will continue to rise by around 3% to 4% a year over the next few years. "And there could be some upside risk to that," he said

 

On the other hand, geopolitical concerns will continue to be positive for gold, as evidenced by the run in the price in recent weeks, amid turmoil in parts of North Africa and the Middle East.

 

Concerns over sovereign debt risks in Europe have also been positive for gold investment, and another supportive factor for gold will be central banks, which switched last year from being net sellers to net buyers of the precious metal.

 

Although the official numbers indicate that central bank purchases of gold may have eased, governments are not always upfront about their activity, Jansen commented.

 

"From an official standpoint it does look like their net purchases are starting to slow, but we don't think that's the really the case at all.

 

"It's just that they are becoming less honest about what they are buying. I really think we can see quite a lot more activity from central bankers in the next couple of years, particularly from those in gold producing economies."

 

Jansen said that gold merger and acquisition activity will remain strong in 2011, particularly at the junior and mid-tier level.

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