HardAssetsInvestor

Written by Lara Crigger  |

October 23, 2009

Leo Larkin: Gold - The ‘Stealth’ Bull Market

Details

The S&P equity analyst shares his thoughts on where gold's headed next.

• Is the rally overheated?
• Have investors missed their chance?
• Why mid-tier producers might attract more money

 

With gold riding ever-higher peaks lately, it's hard to imagine that any investor could still remain in the dark about the potential of the yellow metal. But despite the record-breaking prices, says S&P Equity Analyst Leo Larkin, the greater investing public just hasn't jumped on board the gold train. That could mean even higher prices ahead, he says, both for bullion and miners.

An expert in metals and mining, Mr. Larkin recently sat down with HAI Associate Editor Lara Crigger to share his thoughts on gold, including whether the rally is overheated, how miners both large and small will fare in the coming months, and whether investors have missed their chance to get in.
 

Lara Crigger, associate editor, HardAssetsInvestor.com (Crigger): Gold's been on a tear lately. Is there a risk this rally will become overheated?

Leo Larkin, equity analyst, Standard & Poor's (Larkin): It certainly looks overbought. It's looked overbought for some time now. Maybe what will happen is that it will consolidate sideways before going higher, but it just doesn't seem to be giving up an awful lot of ground.

Frankly, it's stronger than I thought it would be. My year-end target price for gold was $1,050/oz., and we're there already.

Crigger: Your colleague Mark Arbeter said that $1,200/oz., even $1,500/oz., wasn't that far off.

Larkin: Well, Mark was using technical charting patterns to derive that target, and that's fine. My own target is still $1,050/oz., and although it may look like it's out of line for what we're seeing now, I haven't changed it, or my target of $1,200/oz. for 2010, although some might say now that that's too conservative.

Crigger: Do you expect that we'll see a bit of a pullback?

Larkin: I think there's going to be a little bit more ebb and flow to the market, although so far, that doesn't seem to be the case. It's not pulling back very much. And it's not giving people who haven't yet invested a chance to get in at a lower price. That tends to happen in a bull market; people wait around for a correction, but it never goes down far enough to give people an opportunity to get in at a more favorable price.

Crigger: So have investors missed their opportunity to jump into gold, then?

Larkin: Not necessarily. I think the trend is still higher. Like I said, I'm looking for $1,200/oz. at the end of next year. Again, that may be too conservative, but even that is a big increase from where we are now. It's roughly a 14 percent gain.

I've seen numbers near $2,000/oz. in that same time frame. I suppose that's possible, but it's an awfully large gain. If you adjust gold for inflation to where it was in 1980—it peaked in 1980 at about $850/oz.—people are coming up with a number of $2,000/oz. So I don't think a number like that would be too out of line. But it's not the type of number I'd expect to see in the next several years. Then again, it did surprise me on the upside.

Crigger: So ultimately, can the good times continue?

Larkin: There's quite a bullish consensus for gold right now, and sometimes, that can be a bad thing for prices. But even with gold where it is, it still strikes me as something of a "stealth" bull market.

Crigger: A stealth bull market? Really?

Larkin: Yes, because when you think of how much gold has risen since 2001—it's nearly quadrupled—it still doesn't seem to have excited an awful lot of people. There doesn't seem to be much public participation yet. There's no sense of a mania, at this juncture. One day, there probably will be, and then it will be really big. So some people who suggest that this is a bubble already, I think are probably mistaken.

But professional investors are taking a different attitude. For a long time, I think they dismissed it. Now, gold has done so well, it's starting to attract attention from institutions that heretofore would not have bothered with it. I see it even gets more coverage on CNBC, which has been pretty hostile toward it over the years.