Gold Price Outlook

Gold has continued to set new records during the June 2011 quarter. As of June 27, it was trading at US$1,502/ounce, after an all-time high of US$1,563.70/oz. (April 29). It started the quarter at US$1429/oz. Overall, the U.S. dollar gold price is up 21% in the past twelve months.

We think that the U.S. dollar could arrest its long-term decline, which is negative for gold. However, it is the Eurozone sovereign debt crisis that could be the key to ignite further investment demand for gold. At the very least, it will keep the focus on gold as a source of some 'insurance' during a very uncertain period for the global financial system. For this reason we maintain the position we have held in our past Reviews: although we have some concerns regarding the fundamentals for gold, it would be foolish to bet against the gold price in the short to medium term. The risk seems to be more on the upside than the downside for the next six months. In our last Review (March Quarter 2011) we forecast a gold price averaging US$1,450/ounce over the ensuing six months. We raise our forecast to US$1,550/ounce for the six months ahead.

Longer term (beyond 2011), we are cautious on the outlook for gold. We are concerned about the recent outflows of gold onto the market from Exchange Traded Funds. We do not expect the U.S. dollar to collapse (it, in itself, is a safe haven), and we consider inflation fears are over-stated. Eventually gold's unique safe haven appeal could start to dissipate. Our guess (and it is only a guess!) is in the first half of 2012, particularly if we see signs of a recovery in equity and property markets and positive real interest rates in the U.S.

Gold Equities

Gold equities (as measured by the major gold share indices) have performed poorly in the past year, as is indicated in the table below. The five share indices detailed below have all significantly underperformed the U.S. dollar gold price (and overall equity markets) in the twelve months since June 24 2010. Only the Australian share index is in positive territory (up 8%) despite the U.S. dollar gold price rising by 21% in that period. Gold may have been a safe haven in uncertain times, but gold shares in the past year definitely have not been.