Do hedge funds see gold as an alternative currency?

Dorothy Kosich
’14-DEC-06 08:00′

RENO, NV (Mineweb.com) –Citing a potential hedge fund paradigm shift for gold as an alternative currency, Toronto’s National Bank Financial (NBF) Tuesday revised its gold price forecast upward from $600/oz to $650/oz in 2007.

Analyst Tanya Jakusconek and associates Susan Muir and Farooq Hamed suggested that the current 5 1/2 year rally in gold prices “may represent a paradigm shift for gold as it has taken on a new role as an alternative currency (portfolio diversification) and has the potential to play a larger role as a foreign reserve asset.” As proof, she noted that fund buying now accounts for more than 900 tonnes of gold internationally.

“On the central bank front, there may be demand potential from governments looking to bring their reserves more in line with the world average, including the Chinese government, which is being pressured to diversify its foreign reserves away from the U.S. dollar and into other assets,” according to NBF’s analysis. “Another repegging of the yuan to the U.S. would also be positive for gold.”

Jakusconek said NBF has predicated its outlook on a positive mix of historic price drivers and gold market fundamentals. The historic price drivers include the U.S. dollar, expectations of higher inflation and lower real interest rates. “On the demand side, gold market fundamentals include the continued strong investment demand (gold is increasingly being viewed as an alternative asset to currencies) and current accounts for 912 tonnes (ETFs/COMEX/CBOT) and steady fabrication demand/jewelry demand,” NBF said.

Meanwhile, Jakusconek declared that “the dehedging trend has become entrenched and is continuing, and mine output is leveling off over the next several years (next wave of large new mines does not come into production until 2010 or later).”

NBF asserted that its new 2007 forecast of $650/oz gold is in line with a consensus average of 24 brokers. The bank also raised cash costs for all companies “as the higher gold price assumes mining of lower-grade material, which generally results in higher costs.” Jakusconek’s top picks continue to be Goldcorp in the senior group and Agnico-Eagle and Eldorado Gold in the mid-tier producers

National Bank also raised its 2007 silver price forecast from $12/oz to $13/oz. Jakusconek said NBF’s silver estimates are based on a 50 to 1 ratio with gold.