Is gold headed to $2,400?

Billionaire hedge fund manager and gold bug Eric Sprott, who is also the CEO of Sprott Asset Management, thinks that by the next northern hemisphere summer, gold will be heading towards US$2,400.

In a recent interview with Cambridge House Sprott gave a number of reasons for this bullish view — including a sour outlook on the US Federal Reserve’s handling of the financial crisis — however the focus of his thinking was that there is “way more physical demand than supply.” Sprott believes that over the past couple of years much of the gold demand has been supplied by central banks selling physical gold into the market. He thinks this volume is starting to decline and as it does the actual supply-demand dynamics will become more evident.

Sprott also doesn’t think his forecast is that much of a stretch, being around 25% above gold’s previous high. Certainly if his forecast turns out to be correct, it will be great news for established gold producers who have leverage to a higher gold price. Newcrest (ASX: NCM), Medusa Mining (ASX: MML) and Regis Resources (ASX: RRL) have all seen their share prices slammed in the past year as the gold price tumbled. As the chart below shows, while the broader S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has rallied 20%, these three gold producers’ share prices are down between 25% and 65%.


Source: Google Finance

Foolish takeaway

Interestingly, Sprott says he is even more excited by the outlook for silver. He thinks the next decade will see silver perform the way gold did last decade – which was a return of around 500%!

With many analysts suggesting the average cost of gold production is around US$1,200 there is a widely held belief that this helps establish a floor price. The dramatic sell-off in gold miners has no doubt resulted in at least a few undervalued gold stocks. The time to buy stocks is of course when they are out of favour, which means now could be a good time to be sorting through any knocked down gold or silver miners for bargains.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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