Analyst sees continued strength in gold

U.S. investment strategist Byron Wien says falling gold prices will be one of the big surprises of 2006. Not according to RBC Capital Markets chair Anthony Fell, who delivered an upbeat forecast for bullion at the Empire Club in Toronto on Thursday.

Gold prices, currently fluctuating around $520 US, are set to go much higher, Fell says, since demand from governments around the world already outstrips the current rate at which reserves are increasing, about 1% a year. “This will manifest itself in a much higher gold price,” he told the luncheon, which was attended by David Wilson, the new chair of the Ontario Securities Commission, Richard Nesbitt, CEO of the TSX Group as well as several other corporate chairs and association presidents.

The current U.S. account deficit is off the charts and could also weigh on gold prices. Gold, as Fell reminds us, is one part resource, two parts currency. Central banks around the globe are starting to look at gold as an effective hedge against the softening U.S. dollar. “My view is the Asian central banks are becoming uncomfortable and will be looking to diversify their reserve assets and gold will be on their shopping list,” he says.

None of these conditions are expected to improve since there hasn’t been a major gold deposit located in the last five years and production is currently set to peak in 2008. Fell is so upbeat he offered up a rare stock pick: streetTRACKS Gold Trust (NYSE: GLD). The exchange-traded fund only holds gold and as of June 2005 owned about 5.6 million ounces of the precious metal.

Fell isn’t only bullish on gold — he believes we’re in the first phase of a 15-year upward cycle in commodity prices and that bodes well for Canada. His only caveat is that this run will not progress in a straight line. Prices could pull back this year due to some consolidation among commodities producers.

“The case for rising commodity prices over the coming decade is quite simple and in my view crystal clear,” says Fell. Supplies on a global basis are finite and dwindling and reserve replacement has become a major issue after two decades of reduced exploration. Any new resource find could take up to 10 years to come online.

“We have here the ingredients for a continuation of the secular bull-market in commodities over the coming decade.”

David Rosenberg, chief North American economist for Merrill Lynch in New York, also believes that Canada is in a good position. Even if the U.S. economy goes sour, we should fare well because of demand for commodities, he says. Japan’s turnaround, one of the world’s largest economies and a big importer of Canadian commodities, is just one reason why investors should be optimistic about this part of the Canadian market.

What’s in store for the Canadian dollar? Are markets putting too much faith in the ability of the central banks? Why are economists so concerned about the U.S. housing market? For a more in depth study of the economic picture for 2006 and where Canada fits in, please look to the next issue of Advisor’s Edge Report, which will be mailed to subscribers in mid-January.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(01/06/06)