Merrill Lynch substantially raises gold prices forecast, ups silver too

High gold prices, supported by supply and demand fundamentals, has prompted Merrill Lynch analysts Monday to substantially increase gold price forecasts to an annual average of $1,000/oz by 2009.

Author: Dorothy Kosich
Posted: Tuesday , 12 Feb 2008
RENO, NV -
Citing broadening investor demand, a weak U.S. dollar, record oil prices and ongoing geopolitical tension, Merrill Lynch Monday substantially raised their 2008-2012 gold forecasts, while also predicting increased silver prices.
Research analysts Michael Jalonen and Jeffrey Schok said they expect gold to average $925/oz this year and $1,000/oz in 2009 (up from $750/oz and $800/oz respectively). They raised the long-term gold price forecast from $600/oz to $650/oz, beginning in 2013. "Due to higher forecasts for the 2008-2012 period, our 10-year average gold price has jumped from $655 to $800/oz," they said.
"Notwithstanding the possibility of short-term strength in the US$, higher gold prices should be supported by positive supply-demand fundamentals including stagnant mine production and robust jewellery demand in emerging markets, in our opinion."
ML also made significant increases in EPS and CFPS forecasts for all North American gold producers under the broker's coverage. The companies with the largest EPS changes included Gammon Gold, Gold Star Resources and Centerra. The smallest changes to 2008 EPS forecasts are generally drawn from the lowest cost producers including Goldcorp, Yamana Gold, and Royal Gold.
The analysts also changed net assets values (NAV) for both North American gold and silver producers, based on upgraded gold and silver price assumptions. The gold producers reporting the largest change in estimated NAVs include Kinross, Centerra, and Golden Star. "The main drivers for the above average sensitivity to gold prices changes include higher than average cash costs and/or substantial reserve and resource positions which become economic at higher gold prices," according to Jalonen and Schok.
Gold Supply/Demand
"Looking ahead, we expect global mine production to be effectively stable in 2008, chiefly as a result of lower than anticipated supply from new mines and lower grades at maturing operations," they wrote. "Thereafter we are forecasting volumes to increase in 2009, 2010 and 2011 with average annual growth over this relatively short period of expansion at around 2%. Given extended delays in mine development reported across the sector, however, this may present a somewhat optimistic outlook."
Nevertheless, ML added that they don't anticipate that future gold production will be the historic high of 2,645 tonnes achieved in 2001. "The decline in global output from 2011 onwards is chiefly due to ore depletion at operating mines (defined as mines in production in 2007. Mine closures begin to have an impact in 2009, with losses accelerating from 2012."
Merrill Lynch's research identified France, Switzerland and the ECB to be the main central bank gold sellers from 2007-2009. The Netherlands, Sweden, Germany and Australia are expected to have smaller disposals.
"Given the projected shortfall from the 500 tonne maximum, it is possible that the ECB could accelerate disposals," the analysts suggested, adding that a less likely scenario would involve sales to benefit the IMF.
ML also forecast that producer de-hedging will slow this year. "The accelerated run down in the hedge book has, of course, had a noticeable impact on the delivery profit of the book. We estimate that producer de-hedging lowered supply/enhanced demand by 410 tonnes in 2007. With only a few companies left with meaningful hedge books, we see producer de-hedging declining to roughly 120 tonnes in 2008 (and lower in subsequent years."
Silver Supply/Demand
Noting that the spot silver price has averaged $16.07/oz year-to-date 2008, Merrill Lynch raised its 2008, 2009, and 2010 silver price forecasts from $14, $13 and $12/oz to $15.50, $16.50, and $17/oz respectively. "We are also revising upwards our long-term silver price forecast from $10.00/oz to $10.50/oz.
The analysts forecast that mine production will account for 71% of total silver supply in 2007, as a new generation of silver mines commences production. "For 2008, we are forecasting a 5% increase in YOY mine output to 675 million ounces as several new mines ramp up (San Cristobal and San Bartolome in Bolivia, Palmerejo, Alamo Dorado, Ocampo and Delores in Mexico), and Manatial Espejo in Argentina. Looming in the future is the giant Pascua mine ion Chile."
Based on gold prices of $900/oz and $16.75/oz silver, Merrill Lynch estimated the current gold: silver ratio at around 54 times (or 54 ounces silver for every ounce of gold).