The BarkerLetter

Financial institutions are still smiling on gold prices.

The latest is a BMO Capital Markets economist forecast to the effect that U.S. dollar, inflation and equity market risks will buoy gold prices thanks to its defensive properties.

That’s good news for the junior gold pack.

BMO Capital Markets economists recently predicted that gold will top US$750/oz in 2008, forecasting that “credible risks on the U.S. dollar, inflation and equity market fronts” will buoy gold prices.

That certainly squares with the bullish theory that gold prices are hinged to swing the other way against the greenback. That’s an old theory actually. However, it’s held true for the past two years at least.

BMO notes that gold outperformed stocks, bonds and oil in 2006, and is likely to continue to follow an upward trajectory for some time yet. This gives some credence to what the gold majors were saying late in the last quarter of ‘06. Frankly I had a little trouble believing those rosy predictions from the likes of Newmont, though I never doubted the existence of at least a grain of truth. After years of getting bearish predictions, or outright silence, it was a little hard to adapt to an abrupt about face.

I think it’s important to note the actual targets they’re setting on gold prices. That is extremely unusual because it’s guesswork. But the balance of probabilities has shifted so decisively towards the yellow metal that ordinarily cautious has become bold. Targets are useful because they give investors something to peg future gains to. However it’s always prudent to get out just before they are reached, along with the smart money.

Apparently the biggest drivers in gold prices in 2006 was the drop in the greenback, sticking inflation and, more recently, a waning appetite for risk among investors. That will continue for at least two more years they say.

Another usual milestone there; a date.

Added to the mix is what BMO calls healthy levels of liquidity stemming from yen/dollar carry-trade opportunities and more private buying in Indian and China. Sharp increases in oil and grain prices, 2.7% year over year core inflation, and escalating tensions in the Persian Gulf will prompt investors to hedge against the falling U.S. dollar, purchasing power erosion and capital losses in their equity and bond portfolios.

That’s a green light if I ever saw one.