Citi says rush to gold may trigger a rise above $2000

Mickey Clark
27 Jan 2009

Stand by for the biggest gold rush since the Klondike. The price of the precious metal is set to soar as investors becoming increasingly gloomy about the global economy.

Gold is often seen as a safe haven in times of economic and political upheaval, and is certain to benefit as investors' options of where to put their money are reduced. Citigroup forecasts gold will top $2000 an ounce, the price more than doubling by the summer. It currently trades at about $901, having already come up from $777 since Lehman went bust on last September.

Citigroup says: “We continue to remain unequivocally bullish on the medium- to long-term view on gold, and still believe that we can ultimately see levels in excess of $2000.”

It adds that this can be achieved in several ways, either with gold continuing to be used as a safe haven or by it starting to trade higher as the massive liquidity injection by governments around the world brings reflation, and with it inflation.

The broker does not believe in the hyper-inflation scenario, but takes the view that generating such levels of liquidity will result in growing inflation. Gold briefly touched a record $1030 last March, coinciding with JPMorgan's rescue of Bear Stearns. It has since traded within a narrow range, but Citigroup concludes: “We feel that if we can see a break through resistance in the $875-$890 area, it could open up the way for a move to new highs by this summer.”

Dealers say companies likely to ­benefit would be the big gold miners such as Anglo American, down 17p at 1346p, and Randgold Resources, 57p lower at 3118p. Meanwhile, Rio Tinto remained a weak market, losing 23p at 1633p amid persistent talk that the miner may eventually need to tap shareholders in order to reduce debt levels. BHP Billiton lost 15p at 1235p after Citigroup dropped the shares from its most favoured list.

Shares generally came off the boil, giving back some of yesterday's gains. Wall Street's failure to consolidate its best gains overnight dampened sentiment with investors focusing back on the economy and the growing number of job losses. The FTSE 100 index fell 35.4 to 4173.5.

Barclays extended yesterday's lead with a rise of 4.3p to 93p. The price has slumped from 157p in the past week amid fears the bank will need further funding, and may be nationalised. But Barclays has reassured the City, saying it remains profitable and has no need to raise extra cash. Royal Bank of Scotland added 1.8p to 16.3p while Lloyds Banking firmed 4p to 69.2p.

Wolseley continued to reel from yesterday's profits warning, the shares losing a further 15.6p to 185.4p, stretching the two-day deficit to 100.6p. Brokers fear the plumbing-equipment supplier will have to turn to shareholders for extra funds to reduce debt. Panmure Gordon has cut its target from 280p to 170p.

Kalahari Minerals firmed 1¾p to 43½p after the miner reported that uranium resources at a prospect in Namibia had exceeded expectations.

British Land fell 14¼p to 430¾p after Goldman Sachs downgraded from neutral to sell and slashed its target from 613p to 383p. The broker warned that real estate investment trusts will need to dispose of properties to combat the recession in the commercial property market, and that could lead to a dilution of earnings.

Goldman has raised rival Hammerson, 1½p lighter at 396½p, from sell to neutral but lowered the target from 591p to 484p. It has also cut Brixton, off 2¼p at 94p, from 153p to 103p, Great Portland Estates, 3¼p firmer at 223p, from 244p to 221p, Segro, ½p easier at 165p, from 276p to 190p and Shaftesbury, unmoved on 277p, from 316p to 281p. All three companies continue to be rated neutral.

Derwent, off 5½p at 594½p, remains a sell, with its sights lowered from 607p to 537p, along with Liberty International, 1¾p lighter at 378½p, with the target down from 581p to 392p.