Outlook 2008 (9 sectors to watch): Gold

Are you ready for gold priced at $1,000? The conditions pushing prices higher are still present, so don’t be surprised.

If gold doesn’t have a good year in 2008, gold bugs are going to have some explaining to do. After all, the financial pages are filled with news that has traditionally pushed prices higher. The chaos wrought upon the financial markets by the meltdown in sub-prime mortgages, the weakness of the U.S. dollar, continued geopolitical uncertainty in the Middle East, fear that a U.S. slowdown could trigger a global recession, renewed concerns about inflation — all helped push prices just past US$840 an ounce in November (its highest level in more than 27 years) before pulling back from that near-historic high.

None of these factors seem to be fading anytime soon — which has led many gold-market watchers to openly speculate about prices hitting US$1,000. “Increasing geopolitical risk, combined with increasing economic uncertainty should continue to provide incentive for investors to increase their exposure to gold as a safe haven,” says Stephen Walker, director of global mining research at Toronto-based RBC Capital Markets in a recent research report.

RBC predicts that gold could reach as much as US$900 in early 2008, but some dark clouds could very well rain on the parade. The recent spike in prices could put a damper on demand — especially in places such as Japan and India, warns Walker. Recent investor interest in gold has come primarily as a result of weakness in the U.S. dollar and uncertainty about U.S. financial markets. But that interest may start to dwindle should the greenback recover, according to a report by TD Bank Financial Group. “The downswing in the U.S. dollar is likely to taper off in the months ahead,” it notes. “Based on this scenario, gold prices are likely to trade in a range of US$740 to US$800 per ounce in 2008.”

While gold’s recent performance has been impressive, it is still well below the historic high of about US$2,000 per ounce (inflation-adjusted) it hit in 1980. But current levels will be difficult to maintain, warns François Dupuis, chief economist at Desjardins Group. “Like gold, all precious metals could continue to appreciate somewhat in the future,” he says. “[However], a correction is possible at some point in 2008 when speculators will shift toward other assets that have become more appealing.”