While both gold and gold stocks have not experienced the same sort of declines base metals or oil producers have in the past few months, the price discrepancy between bullion and related equities persists. Gold is off 15% and the S&P/TSX Gold index has lost a third of its value in the past two months. Meanwhile, oil has declined more than 50%, zinc has fallen more than 30% and the S&P/TSX composite index has declined roughly 35%. Scotia Capital analyst Trevor Turnbull remains bullish on gold, noting that dollar demand for the metal reached an all-time quarterly record of US$32-billion in the third quarter as investors flocked to safety. He also highlighted the identifiable investment demand gold offers, which includes ETFs, bars and coins. Mine production, meanwhile, is expected to fall in 2009 as new projects are delayed and some older higher-cost operations will likely shutdown as metal prices stay flat, Mr. Turnbull predicted. He also noted that central bank sales appear to be shrinking, while their purchases have started to rise. As for the U.S. dollar, it has benefited since the credit crisis began as investors discard equities, commodities and other currencies in favour or cash and U.S. treasuries. When this trend reverses, it will be extremely positive for gold, the analyst told clients. However, he doesn’t see this happening for six to eight months. “We believe that, as the credit and financial crisis continues to deepen the U.S. dollar will eventually show its true colours and weaken against the world’s currencies,” Mr. Turnbull said. He expects the lack of liquidity plaguing the markets to persist and push all asset classes lower or at least prevent them from staging bull runs. “In the interim gold should react better than most asset classes as investors will likely continue to look to it to hedge against the financial uncertainty and the credit crisis which appears to be growing,” the analyst said. Scotia believes the price of gold will be in the range of US$700 to US$900 per ounce in 2009, with an average price of US$825. While gold should hold steady, it may not be able to reach new highs. It is this period of uncertainty and low gold equity valuations, that investors should assemble a solid gold portfolio, Mr. Turnbull said. His top pick is Barrick Gold Corp. as a result of its large project pipeline, solid asset base and strong balance sheet. Yamana Gold Inc. gets the nod for its near-term production growth, while Red Back Mining Inc. is favoured due to its organic growth and potential role as a consolidator in West Africa.

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