Conflicting Signals For Gold

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Analysts are modestly upbeat about the price of gold as the world continues to be anxious about growth and geopolitical conflicts.

-Gold price not expected to bounce as another US rate hike expected in 2017
-Yet geopolitical concerns provide support
-If US Fed persists with “looking through” low inflation this could add further downside risk
 

By Eva Brocklehurst

Analysts are mulling the state of play in gold, noting the price has struggled recently and a tight range of US$1200-1300/oz has been traded in 2017 so far. That said, the gold price is up almost 8% in the first half.

A sharp rise in gold imports from India and China in the first half of the year provided some support for the yellow metal, although the World Gold Council predicts some easing in Indian demand because of the launch of a GST in July.

In the midst of this, demand for gold from central banks has been subdued, analysts at National Australia Bank suggest, although Russia's central bank has been steadily increasing its purchases of gold. On the supply side, gold production is expected to ease back in 2017.

In sum, the NAB analysts are mildly optimistic about gold, despite the near-term weakness, believing that the safe-haven status of gold and possible re-emergence of financial market volatility should underpin demand.

They forecast the price of gold to be around US$1235/oz by the end of the year and rise to US$1300/oz by the end of 2018. In order for the gold price to descend to around US$1100/oz and below, the analysts suggest a period of geopolitical and financial calm needs to settle on the globe.

Conversely, a financial shock or geopolitical upset could mean the price surges above US$1400/oz but this, they emphasise, is not the central forecast.

Morgan Stanley has a stable call on gold, which assumes the world remains anxious about global growth, but acknowledges a more hawkish US Federal Reserve could weigh on the short-term price outlook.

The current trend in gold appears to be threatening the floor of this year's trading range. Moreover, the broker does not believe the gold price will bounce, convinced that the US Fed will impose another rate rise this year. Admittedly, this requires the Fed to look through a persistent softening in the US inflation rate.

Morgan Stanley remains a modest bull on gold and acknowledges, compared with the rest of its metal coverage, this is enough to make gold one of its top picks for 2017-18. This outlook is largely based on the view that global growth is unsettled by geopolitical conflicts.

If the US Fed ignores soft inflation and pushes ahead with another rate hike, as well as three more next year (which is Morgan Stanley's house view), then investors may soon regard this as the dominant price driver for gold and not the state of global politics. Hence, the broker incorporates this aspect as the new downside risk for its gold price outlook.

Morgan Stanley also points out that, despite the popular view that US rate hikes weigh on gold prices, the rule does not work in the first 12-18 months of a rate hike cycle. Instead, the gold price typically lifts 10-20%.

Morgan Stanley forecasts a gold price of US$1250/oz in 2017-18, with a flat or benign outlook beyond this time frame. The bearish signals for gold, which the broker advises should be tracked by investors, include a persistent lift in real rates and a decline in non-commercial net positions in the commodity.

Macquarie also suggests the gold price is being affected by the market's belief that central banks are keen to normalise monetary policy. The next event is the European Central Bank meeting and only small changes are expected.

The broker agrees that, while chairman Janet Yellen has hinted that low inflation is becoming more of a worry, the US Fed still appears fairly committed to raising rates again this year.

Among the broker's top picks in Australian gold miners is junior producer Saracen Minerals ((SAR)), which has reaffirmed its potential for meaningful upgrades to mine life and cash flow.

Macquarie notes drilling results at Thunderbox indicate consistent grades with depth that could be conducive to a bulk mining operation below the currently producing open pit.

The broker's top picks among the major producers include Evolution Mining ((EVN)) and OceanaGold ((OGC)). As well as Saracen Minerals in the juniors, Macquarie also includes St Barbara ((SBM)) and Resolute Mining ((RSG)) in its top picks.

Among the developers and explorers the broker highlights Dacian Gold ((DCN)) and Gold Road Resources ((GOR)).

Meanwhile, Macquarie flags Northern Star's ((NST)) underwhelming FY18 guidance. Increased production at Jundee and Kalgoorlie are not covering the notional deferral of production at Tanami and what Macquarie assumes will be a cessation of production at Paulsens in mid FY18.
 

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