Gold has managed to stand out relative to most asset classes in the current global economic turmoil, reports Australian equity research firm Resource Capital Research (RCR).

“The key factor for gold in recent months is not that it has not appreciated significantly, but that it has essentially held its value in a period of a strong US dollar, decreasing inflationary expectations, collapsing oil and commodity prices, and aggressive hedge fund selling,” states the company’s December quarter research report on junior and midtier gold companies.

RCR notes that the gold price was down by only 3,8% in the last three months, and was up 8,4% in the last month.

Data for the third quarter of 2008 shows that investment demand for gold rose strongly during the period, with record quarterly inflows into exchange-traded funds of 150 t, supple-mented by further growth in coin and bar demand.

Additionally, jewellery demand (mainly from Indian and China) has remained strong (up 8% on the previous year’s figures).

“It is apparent that this strong increase in investment demand has been sufficient to absorb widespread disinvestment arising from hedge fund selling, margin calls and the unwinding of long gold/short dollar contracts.

“We believe that shrinking cash and bond yields and the recent lift in the gold price may only serve to support further investment interest in gold as a safe haven store of value,” states the RCR December quarter report.

RCR believes that the near-term outlook for the gold price remains tied closely to investment demand from safe haven buy- ing, which has underpinned the price in recent months, and is looking increasingly strong.

“If gold disinvestment tails off, there is potential for further price gains.

“There is additional upside for a major gold price breakthrough should the US dollar lose its current safe haven currency status, through a further decline in the US economic outlook relative to other world economies in 2009.”

RCR says it expects gold to trade in the range of $750/oz to $850/oz in the next month or so, followed by a potential upturn to about $900/oz in the first half of 2009, assuming US economic conditions deter- iorate relative to other major economies, and the US dollar weakens.

The RCR December quarter report says established gold producers, driven by the fall in the gold price, have given up most of the share price gains made since mid-2007, and many juniors are down more than 70% compared with figures 12 months ago.

In the past three months, Newcrest Mining was down 17%, Lihir Gold 18%, Newmont Mining 36% and Barrick Gold 25%.

Over the past 12 months, Newcrest Min- ing shed 36% in price, Lihir Gold 53%, Newmont Mining 45% and Barrick Gold 35%.

Gold Producers

The RCR December quarter report notes that producer margins have been adversely affected by structural trends in 2008, including rising industry cost pressures owing to a number of factors, including falling mill head grades, deeper orebodies, higher energy costs and increased demand for materials and labour; strengthening producer currencies compressing operating margins and cashflow; and the discovery of fewer and smaller deposits impacting on asset quality.

However, it adds, over the last three months, two of these trends reversed “quite dramatically”.

Firstly, there is clear evidence that cost pressures due to energy costs and demand for materials and labour are easing rapidly and, secondly, and of most significance, is the major fall seen in producer currencies against the US dollar.

This has spelled a strong appreciation in the price of gold in key producer currencies.

“Despite a 12-month increase in the US dollar gold price of only 5%, the gold price in Australian dollars, Canadian dollars and South African rands has increased by 40% for Canadian producers, 48% for Australian producers, and 63% for South African producers,” states the RCR report.

It also notes that the gold industry faces exploration challenges, in general, as there are fewer discoveries and deposits are harder and more expensive to find.

Gold mine production is also shifting away from traditional to nontraditional producers, with South African production at the lowest level in 85 years, and Austra- lian production at the lowest level in 15 years.