RBC Capital Markets expects the gold price to remain firm through Q1/09, buoyed by a seasonally strong period for physical demand and continued investment demand due to ongoing financial market concerns. Given the strength of the rally in gold equities in the first month of the year, RBC Capital Markets would be cautious on the stocks as many continue to trade above historical valuation ranges and, therefore, may provide limited upside from current prices. RBC Capital Markets expects the gold price to exhibit volatility in 2009, which should result in potentially attractive buying opportunities for the stocks on pullbacks into periods of weak demand in Q2/09 and Q3/09. In RBC Capital Markets’ view, there is risk of a significant June-July period of weakness for gold demand and the potential for emerging market scrap sales in an extended global recession. 

RBC Capital Markets continues to favour gold companies with improving production and cost profiles, gold reserve upside, active exploration programs, solid balance sheets, and strong management teams. Gold equities that it believes offer investors a combination of these characteristics include: AngloGold Ashanti, Barrick Gold, Goldcorp, Newcrest Mining and Yamana.  Moving to the intermediates, RBC Capital Markets would add Franco-Nevada, IAMGOLD and Red Back Mining, followed by Great Basin Gold and Jaguar Mining among the smaller-cap names.

Heading into 2009, RBC Capital Markets maintains its view that gold and gold equities should continue to perform relatively well in the current economic environment and recommend an overweight position in investors’ portfolios. RBC Capital Markets expects the gold price to remain volatile and by mid-year we could see significant corrections similar to those experienced in May 2006 and Q3/08. Key elements to RBC Capital Markets’ thesis include:

• Gold should perform well early in 2009, as seasonal demand and investment flows are expected to push the price back up to the $900 to $950/oz range. In the current environment of geopolitical and financial uncertainty, gold continues to offer investors a safe haven as a beta-negative asset.
• However, by mid-year, RBC Capital Markets’ expectation of an extended global recession could result in significant economic pressures in the Emerging Market economies and it would expect gold to retreat and test $750/oz and gold equities to correct significantly. This expected destocking or sales of scrap gold could be similar to what happened in 1998 during the Asian Tiger currency / economic crisis when gold sales more than offset investment demand for gold, which led to lower gold prices.
• The extraordinary amount of fiscal and monetary stimuli is expected to result in a recovery of the global economy in 2010, and gold equities have traditionally rallied early in an economic recovery cycle.
• If RBC Capital Markets’ forecast mid-year correction occurs, it would use this pullback as a buying opportunity, as RBC Capital Markets expects gold to return to the $1,000/oz level, and gold equities to rebound, with evidence of a recovering global economy later in 2009 or early 2010.

RBC Capital Markets is maintaining its average gold price forecasts of $850/oz for 2009, $875/oz for 2010, and $900/oz long-term. As noted above, it expects significant volatility in the gold price, and we could see a trading range from $750/oz to $1,000/oz in 2009. Gold equities are also expected to be volatile, as they tend to trade off the spot price and not a projected average for a forecast period.