Gold, silver offer investment opportunity: Citigroup

In a research report entitled “Hello Precious” — analysts at Citi Investment Research and Analysis argue that the precious metal space offers “good valuation potential as well as headline commodity upside.”

That’s hardly big news to many in the mining industry and you’d probably be hard-pressed to find anyone who doubts gold can be a safe haven in uncertain markets, but the authors do serve up some interesting statistics.

For instance, over the past four earnings recessions in the United States, the gold price has outperformed the S&P 500 index by 18%. That percentage falls to a respectable 15% “in a true economic recession.”

Gold is also the most active subsector amongst mergers and acquisitions in the mining sector. Over the last 10 years, M&A deals involving gold companies reached US$115 billion, more than 50% higher than the next commodity subsector, which during this period was coal with a deal value of about US$83 billion, the authors write in their April 11 report. (The third-and fourth-largest subsectors were copper with US$60 billion of deals and iron ore with US$32 billion.)

And it’s an M&A trend that is likely to continue, given high gold prices, “slowing reserve addition of the majors and a growing mid-tier producing space.”

In terms of high gold prices, worries about how Greece plans to service its huge debt and the fragile economic recovery in the U.S., pushed gold prices up yet again during April 5-9. COMEX gold for June delivery, jumped US$35.80 per oz. during that period to settle at $1,161.90 per oz., a new high for the year.

While the key bull arguments are a weak U.S. dollar and anxiety over inflation, what is new, the analysts write, “is the re-emergence of asset price inflation and negative real rates in China.

“We view China as the most important source of future demand growth,” they argue, adding that last year gold demand increased by 10% with “particularly strong retail investment demand.”

Other important factors that will sustain high gold prices include reduced selling by central banks and continued de-hedging by producers.

“Central banks may actually become net buyers in the next two to three years,” the analysts write. “China and Indian central banks remain underweight in gold with only 1.5% and 4.1% of total reserves in gold, (versus the Euro Area average of 54%).”