Australian Dollar Exposure Key To Gold Stocks

This story features EVOLUTION MINING LIMITED, and other companies. For more info SHARE ANALYSIS: EVN

-Currency crucial to Oz gold stocks
-Real US interest rates a major factor
 

By Eva Brocklehurst

Gold remains lacklustre despite a recent price jump on the back of weak US jobs data. Gold stands out for Deutsche Bank as one of just four commodities out of 20 that are richly valued versus historical ranges since 2000. The others are lead, palladium and cocoa.

Medium term fundamentals are expected to remain negative for gold as long as US economic data supports a slow normalising of the Federal Reserve’s monetary policy, in that real interest rates move gradually higher.

UBS calculates the valuations for gold stocks relative to current share prices in attempting to uncover what is being factored in. The analysis suggests an average implied price of US$1,089/oz, a 2.0% discount to the spot price. The broker deduces that the market is becoming more comfortable with gold prices and the downside risk to the metal may be increasingly limited.

The broker’s top plays for the sector include Evolution Mining ((EVN)), Alacer Gold ((AQG)) and Regis Resources ((RRL)). Evolution Mining is appreciated for its increasing scale, which will add liquidity to the stock, as well as its operational diversity. Alacer Gold’s long-life, low-cost Copler asset is appealing while the turnaround at Regis Resources has been impressive.

While Newcrest Mining ((NCM))  remains a sizeable and liquid stock, it is primarily sought by offshore investors wanting exposure to the Australian dollar tailwind and UBS struggles to find the value, given the uncertainty surrounding the Lihir mine.

Macquarie emerged from the Denver gold conference more confident in the theme of buying the currency tailwind. With Australian gold prices around $1500/oz the broker continues to highlight companies with large exposure to the weakening currency as these should be able to maintain margins. The broker’s preferred Australian mid-cap producers are Evolution Mining, St Barbara ((SBM)), Saracen Minerals ((SAR)), Northern Star Resources ((NST)) and Doray Minerals ((DRM)).

Macquarie recently downgraded its Australian dollar forecasts and Newcrest is considered a major beneficiary, because of the long mine life of Cadia Valley and, to a lesser extent, Lihir Island. Northern Star is also exposed to the currency weakness. Macquarie recently upgraded both Newcrest and Northern Star to Outperform.

Deutsche Bank considers the negative impact on inflation of lower oil prices is now diminished. In the short term there are upside risks to gold from soft investor appetite for risk assets and the willingness on the part of the US Federal Reserve to incorporate weakness and financial volatility in emerging markets into the timing of its policy decisions.

The broker believes the US dollar has substantially less importance for gold compared with real interest rates and, while expecting the US dollar will continue to appreciate through to the end of 2016, this may only be mildly negative for the gold price.

Meanwhile, central bank holdings of gold continue to increase although to June, this is almost entirely attributable to Chinese accumulation, the broker contends. Data after June is expected to show a reduction in Chinese reserve holdings of gold as authorities rebalance to adjust for sales of US dollar-denominated reserve assets.

In terms of additions to central bank gold reserves, Macquarie notes IMF data reveals Russia was the major player adding gold in August while Mongolia was the only seller of note. The IMF figures do not include China and it must be noted that not all countries report gold holdings on time. Macquarie calculates Chinese imports of gold increased in August but cautions that the gold price was very weak during that month and both China and India typically import more gold during such times.
 

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