What planet do gold 'experts' live on?

As gold hovers near historic highs, Dominic Frisby considers the precious metals 'expert' who predicted a high of $900 for the entire year, why $1,250 is nearer the mark - and why junior gold miners are underperforming.

This week the London Bullion Market Association (LBMA) released the forecasts of 28 precious metal experts in its annual competition.

Most years, Ross Norman of TheBullionDesk wins - and most years he makes the most bullish forecast. He has again this year. He reckons gold will hit a high of $1,250 an ounce before the year is out, and won't sink below $840.

Meanwhile, one expert from Commerzbank International in Luxembourg, suggested a high for the year of $900. I don't know what planet he's on but that got breached before 2008 was two weeks old, in fact on the very day that the LBMA released their forecast.

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But he's not the only expert who seems to be out of touch with the real world

Over 40% of the participants in the LBMA gold price forecasting competition do not expect to see gold hit $1,000 an ounce. Only three of the 24 (12.5%) see highs above $1,050. I wonder how many of these people look at money supply growth figures. Mark my words, Norman will come first or second in this competition yet again. Gold will break $1,100 this year. The surprises in this gold bull market have always been on the upside.

A low-cost, low-stress alternative to hedge funds

Take last year for example. Let's look at the performance of some of 2007's top hedge funds those mysterious and much-hyped investors we all hear so much about (if you want to find out a bit more about what hedge funds actually are, see MoneyWeek's cover story this week: How to join the hedge fund club).

We saw Altin AG return 27%; Dexion Absolute 14%; Absolute Return 24% and Invesco Perpetual 35%. These are all good, market-beating returns and the managers, who are no doubt intelligent, and certainly well paid, can feel pleased with their achievements. They and the investors who backed them - will consider the vast amounts of money, time and effort spent on their research and analysis well invested.

Alternatively, of course, they could all have bought gold, seen a 30%+ return on their money, and taken the rest of the year off.

Why are the junior mining companies lagging so far behind?

One fund that did not have a stellar year was RAB Capital. You'll probably have heard about the group's investments in Northern Rock but this in fact constitutes a tiny portion of their portfolio.

They invest largely in junior mining and exploration companies and, despite the phenomenal performance of gold, the underlying asset of the majority of these stocks, the fund was down. Why are these juniors in a bear market, when gold and silver are flying? A 30% move in gold should see more than a doubling of these juniors, not a decline.

Here are some possible answers:

Firstly, many junior mining companies haven't been increasing their profits during this period of high prices. Construction costs and operating costs are rising as fast (or faster) than the gold price. Since corporations are valued based on expected future profits (rather than a simple proportional relationship to gold price), there has not yet been sufficient justification to bid up valuations. Even things such as the acid used in heap leach operations is experiencing significant cost increases.

Secondly, exchange-traded funds (ETFs) might be a factor. Why take individual company risk; why even bother doing any research on a company, when you can just buy GDX, the ETF which tracks the HUI index of gold miners? And if you want leverage, you can just trade options on it. So I think the ETFs have taken huge amounts of capital that would otherwise have gone into juniors - capital that pushed them higher in previous moves when the GDX didn't exist.

Thirdly, people might have been so hurt in previous corrections that they are reluctant to put more money into this high-risk sector, while, more generally, with the deflationary impact of this credit crisis, appetite for speculation has disappeared. Exploration is highly speculative and capital-intensive it badly needs funding.

Fourthly, small caps market-wide have been hit much harder than large (just look at the Aim index for example) and this has spread into mining companies too.

However, money can't keep going into large cap miners and ETFs indefinitely. At a certain point, it has to go into the juniors. Valuations are extremely compelling, and soon we are going to see a flood of mergers and takeovers it's inevitable that money will start to flow in. You can read about some of the juniors I particularly like in the cover story I wrote for MoneyWeek towards the end of last year (Get out of money - and into things). If you're not a subscriber, you can get access to this article - and this week's cover story on hedge funds - now by signing up for a three-week free trial of MoneyWeek: MoneyWeek free trial.

Turning to the wider markets

IBM leads US rebound

In London yesterday, property stocks once again dominated the blue-chip risers on news that investors Laxey Partners were targeting the sector with a £1bn fund. The FTSE 100 ended the day 13 points higher, at 6,215, and the broader indices were also firmer. For a full market report, see: London market close.

Elsewhere in Europe, the Paris CAC-40 gained 32 points to end the day at 5,403, with tech and IT services stocks including CapGemini given a boost by good results for US peer IBM. In Frankfurt, the DAX-30 climbed 14 points to end the day at 7,732.

On Wall Street, IBM - which added 5% after announcing strong results yesterday - led a rebound which saw the Dow Jones add 171 points to end the day at 12,778. The tech-rich Nasdaq was up 38 points, at 2,478. And the broader S&P 500 was 15 points higher, at 1,416.

In Asia, the Japanese Nikkei fell 138 points to 13,972 and the Hong Kong Hang Seng was down 630 points, at 25,837.

Gold hovers near all-time high

Crude oil had dipped to $94.00 a barrel this morning, whilst Brent spot had slid back to $92.21 in London.

Spot gold was hovering just below yesterday's all-time high of $914.00, touched yesterday in intra-day trade, and was last trading at $907.00 this morning. Silver, meanwhile, had risen to $16.42 an ounce.

Turning to forex, sterling hit an all-time low against the euro before edging back up to 1.3211 this morning, and sterling was also trading at 1.9610 against the dollar. The dollar was at 0.6734 against the euro and 107.59 against the Japanese yen.

And in London this morning, Tesco shares slumped by as much as 5.5% - hitting a four month low - as the UK's biggest retailer announced below-expectation results for the Christmas periods. Sales growth fell to 3.1% from 4.1% in the previous quarter, and below the 4% predicted by analysts. Finance Director Andrew Higginson said that consumers were being 'cautious' and piled more pressure on the Bank of England to cut interest rates next month.

Our recommended article for today...

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