Gold seen hitting $2,000 in fall spike

Where is the price of gold heading?

A lot higher, predicts John Ing, president of Toronto-based Maison Placements Canada. And that, in turn, could light a fire under gold stocks such as Barrick, Eldorado and Agnico-Eagle, which have badly lagged the runup in the price of the metal, he believes.

Although gold hit a record intraday high of more than $1,607 US an ounce Friday – up more than 500 per cent since 1999 and about 37 per cent over the past year – Ing says the run isn’t over.

He figures gold prices will average slightly over $2,000 an ounce for 2011, implying a spike soon that will carry prices well beyond even that lofty level. His reasoning?

Even though the U.S. is sure to cobble together some kind of deficitreduction plan to avoid default Aug. 2, it will continue to add to its mountainous $14.3-trillion-US pile of debt, pushing off real action until after the 2012 presidential election.

Once that ugly reality sinks in, he says, and credit rating agencies start to downgrade U.S. debt – as some have vowed to do soon – Ing figures it will be tougher for the U.S. to find buyers for its bonds, pushing gold prices even higher as investors seek refuge from both the greenback and the euro.

“There has to be an increase in the U.S. debt ceiling, come hell or high water. But whatever language they use it’s just like the situation in Greece, where there is a (technical) default. The consequence of their actions is to pile more debt on top of more debt,” he says.

“Notwithstanding all the problems and the potential for default in the U.S., people are just saying, ‘Oh well, we’ll skate through this.’ But what I see is, it’s just like a pressure cooker. The pressure is building, and the U.S. is running out of players to finance its deficits.”

With China starting to scale back its $1.1-trillion hoard of U.S. Treasuries and Japan busy funding reconstruction of areas hit by the March earthquake and tsunami, Ing figures crunch time for the U.S. dollar is coming, and that’s sure to be positive for gold.

“I think we’re going to see a move by this fall.”

“When there’s a big (Treasury) financing we’ll get a read on the dollar again, and we will see the gold price go beyond $2,000. So yes, I see a spike in the fall.”

A little over a year ago, Ing was calling for gold – then at $1,260 an ounce – to hit the $2,000 level by the end of 2010. Turns out he was a bit premature, but he says the conditions he expected to see last fall are slowly falling into place. In a report issued Thursday, Ing lays out his case.

“When Obama took office he inherited a national debt of $10.6 trillion. Obama’s 2012 budget deficit is projected at (more than) $1.6 trillion, for the third trillion-dollar deficit in a row, or a whopping 11 per cent of GDP (gross domestic product),” he says. “Assuming Congress and the White House increase the debt ceiling, the national debt by this time next year will be $17 trillion, equivalent to 115 per cent of GDP.

“For much of this century, America was the world’s safest risk. No longer is that true. The U.S. government must borrow 40 per cent of the money it spends. Austerity Greek-style won’t work. Growth won’t work. America’s debt problem lies in its prolifigate deficit spending.”

Despite all the media buzz over the soaring price of gold, many gold stocks have lagged and now look cheap. That’s partly because investors have opted for gold ETFs (exchange-traded funds) instead, but it also reflects the fact that gold still isn’t regarded as a mainstream type of investment.

The market capitalization of all the world’s gold-mining companies totals only about $250 billion, Ing says. That’s just slightly larger than the market cap of a single U.S. company, Microsoft Corp.

“As a percentage of global wealth, gold and gold stocks alone account for less than two per cent,” he notes. And now, with central banks buying bullion again – for the first time in 20 years – and competing with ETFs for a limited supplies of physical gold, Ing says that will also boost prices for both gold and gold producers.

“We believe that the lagging of performance of the gold stocks will end, because not only do they provide a cheaper and leveraged way to accumulate reserves in the ground, but supplies are diminished. Some of the big-cap names are even trading at 10 to 12 times next year’s earnings, and now could be considered value investments,” he says.

Since it’s currently cheaper to secure gold reserves through acquisition than by developing a new mine, Ing figures merger and acqusition activity should also heat up.

“We remain convinced that Detour Gold, Guyana Gold Fields, Osisko, Continental Gold and silver players Excellon and MAG Silver are takeover candidates,” he says.

“We also expect the junior producers to have better upside partially due to exploration and growth in reserves and production. We like Aurizon, Centamin in Egypt, St. Andrew Goldfields, Newstrike and South American Silver prospects at current levels.”