Gold May Challenge Record on Inflation Concern, Citigroup Says

June 6 -- Gold prices may challenge record-high levels within the next three years as higher inflation prompts investors to buy the precious metal as a hedge, according to Citigroup Inc., the world's biggest financial services company.

``We have been positive on gold for three years and expect it to ratchet much, much higher over time,'' Citigroup analyst John Hill said in a June 4 report. ``We would not be surprised to see a test of the old highs of $850 an ounce.''

Bullion for immediate delivery may average $632 an ounce in 2006, compared with $445.39 last year, Hill said. The forecast is 14 percent higher than the bank's earlier prediction. Gold will average $700 next year and $750 in 2008.

The precious metal climbed to a 26-year high of $730.40 an ounce last month after the U.S. Federal Reserve signaled concern about rising prices. Fed Chairman Ben S. Bernanke said yesterday recent increases in measures of inflation ``are unwelcome'' and he will ensure the trend isn't sustained.

Gold rose to a record $850 an ounce in January 1980 when the 1979 Iranian revolution cut oil exports. In today's dollars, that price equals almost $2,100. The precious metal was trading at $635.17 at 3:06 p.m. in Sydney.

Bullion has fallen 13 percent since May 12 as funds and large speculators cut holdings after the metal rose by almost $200 an ounce from Dec. 31 to mid-May. Price movements up and down over the past 50 days are at the highest in 5 1/2 years.

Iran Stand-Off

The stand-off over Iran's nuclear program, which has pushed oil to a record on April 21 and 24, and the unrest in Iraq has fuelled price concern and may also push gold prices higher, the Citigroup analysts said.

The precious metal's 50-day volatility, a measure of how far each day's closing price deviated from the period's average closing price, was at 31.33 at 3:14 p.m. in Sydney. It rose to 31.38 on June 2, the highest since Dec. 2, 1999.

``Following the current period of volatility and instability we expect investors to refocus on the previous concerns of continuing high oil prices leading to higher inflation,'' Citigroup's Sydney-based analysts Jonathan Battershill and Brian Warner said in a June 2 report.

The higher price forecasts have led Citigroup's Hill to upgrade earnings estimates for Barrick Gold Corp., the world's biggest miner of bullion.

Shares of the Toronto-based miner may reach C$44, from Citigroup's previous target of C$40, Hill said in a June 4 report. He is keeping his ``buy'' recommendation.

Newmont, Freeport

Hill upgraded his call on Newmont Mining Corp. to ``buy'' from ``hold'' while raising his target share price for the stock to $75 from $57. Earnings per share for the world's second- biggest gold miner this year are estimated at $2.11, from $1.29, he said.

Earnings per share estimates at Freeport-McMoRan Copper & Gold Inc., which operates the world's second-biggest copper mine in Indonesia, for this year were cut 7 percent to $6.32 and its target price was reduced to $63 from $76.

Citigroup's Sydney-based analysts increased their estimates of net earnings for Australian gold mining companies such as Lihir Gold Ltd., Newcrest Mining Ltd. and Oxiana Ltd.

Battershill and Warner upgraded their target prices for Bendigo Mining Ltd. and Newcrest, while changing their recommendations for Lihir Gold and Oxiana to ``buy'' from ``hold''.