Sunday, November 22, 2009 at 12:42am
In a Global Equity Research note the firm said, “so far the massive expansion of the Fed’s and other central banks’ balance sheets has not affected inflation due to the scale of the de-leveraging and slower money velocity.
“Typically, increases in the money supply base find their way into M2 money supply with a lag. While the Fed is hoping that once the patient begins to recover, it will withdraw the liquidity, experience suggests this will be difficult to do.
(In real central banking, gold is considered number one currency in the world according to the International Bank of Settlement!)
Other positives for gold noted by JP Morgan are purchases by central banks and the belief that the metal’s relationship with the dollar may be changing.
The firm commented, “in the 1990’s central bankers were acting as a group to reduce their gold holdings, confident that the fiat currencies were a better store of value. Now gold’s attractions are re-emerging and bankers look set to be net buyers which should help tighten the market.
“Normally, gold has an inverse relationship with the dollar. However, when fundamentals make gold more attractive, it overcomes its normal relationship. Don’t be surprised if gold is strong even on a modest dollar bounce.”
While consensus long-term price targets for gold are “a little below $1000/oz” the JP Morgan reported pointed out gold tends to “overshoot and undershoot” the long-term trends and said its technical analysis is pointing to a $1,275/oz to $1,300/oz target price for the metal.
JP Morgan also believed that the recent trend of sharply rising costs in the gold mining industry would support the gold price.
“In the last few years the rise in input costs plus deteriorating grades at the mines led to cash costs that rose by around 25% per year.
“With costs under pressure globally we have seen some downward pressure on input costs in the last two quarters. However, with the last set of quarterly results, two mining companies pointed out that the shortage of skilled labor was such that the cost of specialized labor had begun to rise again.”