Sector outlook: Gold

Sectors in-the-know investors will definitely want to keep an eye on

Investors who have been looking at the recent downward slump in the price of gold could be forgiven if they thought the long-anticipated rally on the yellow metal was over. After all, prices have fallen from a high of US$725 an ounce in May 2006 to roughly US$630 in December. But gold may regain some of its lustre in 2007, analysts predict, as it draws strength from continued weakness in the U.S. dollar, strong supply-and-demand fundamentals and mounting political tensions in the Middle East–all traditionally bullish factors.

On average, gold prices will be higher in 2007 than in the previous year, and should reach about US$675 per ounce, analysts at Merrill Lynch predict. Strong fundamentals, such as increased demand for gold bullion, higher investment demand and lower gold sales from central banks, have prompted the New York-based investment house to increase its gold price forecast for 2008 to an average of US$650, up from its previous target of US$600.

Such estimates are conservative compared to those of analysts at Toronto-based RBC Capital Markets. “Gold is likely to remain in a bullish cycle for the remainder of this decade, and possibly even longer,” says Myles Zyblock, RBC's chief institutional strategist and director of Capital Markets Research, in a recent report. The high that gold hit in 2006, RBC says, was just a “way station” on the road to prices making another run at their all-time high of US$850 per ounce. And that test–or at least a test of last year's high–could come early on in 2007, during the traditional period of seasonal gold demand in India, RBC predicts.

The best way for investors to play the predicted gold rally is to look for producers with strong production and reserve profiles that are highly leveraged to the rising gold price, RBC recommends. Those companies include large producers, such as Vancouver-based Goldcorp Inc. (TSX: G), as well as up-and-comers like Toronto-based Kinross Gold Corp. (TSX: K). Of course, investors who are merely looking for exposure to a potential gold rally can also now invest in a growing number of exchange-traded gold funds.