Commodities | Oct 03 2018
Bullish signals are emerging for gold while Australian gold stocks appear underappreciated on the world stage, yet brokers suspect it may be too early to sign off on any rally.
-Long US dollar/short gold trade should revert to the mean at some stage
-Gold's appeal to central banks may be widening
-Australian gold stocks tell strong stories at Denver conference
By Eva Brocklehurst
The gold price may not be ready to rally, despite several presenters at the Denver gold conference suggesting the US is ripe for a downturn. The US dollar remains strong and JPMorgan observes investors appear unperturbed by an increasing risk in emerging markets.
Both the World Gold Council and industry consultant CPM Group forecast US growth to slow in 2019, with a US recession considered possible. The gross COMEX short position in gold has reached record highs, yet the presenters were unsure about a catalyst, or when this position would unwind, although acknowledge the long US dollar/short gold trade should revert to the mean at some stage.
Macquarie questions whether expectations of rising interest rates from the US Federal Reserve are as bearish for gold as they once were. The US employment report due out this week will be keenly observed, as it may raise expectations of a rate hike.
In the past, the prospect of higher interest rates was an indicator that fears regarding an economic slump were fading but now it is signalling concerns over inflation and may be bullish for gold. However, the main bullish sign for gold at present is rising purchases by central banks.
Taken at face value, purchases in 2018 suggests gold's appeal to central banks may be widening. India's reserves have been rising in recent months and Poland has added to its reserves, which Macquarie suggests may be the first by an EU member this century. The reason why Poland bought gold is not yet known.
Using IMF and national central bank data the broker estimates central banks bought 36t of gold in August taking year-to-date purchases to 264t, the most at this stage of the year for any period in the last six years.
As the gold market has been struggling with too much supply and not enough demand Macquarie suggests this has thrown a lifeline to the yellow metal. So far, purchases in 2018 are dominated by Russia and some other former Soviet states such as Kazakhstan and Tajikistan.
Their motives for buying gold appear specific, such as economic or geopolitical marginalisation. Turkey has been added to the list of buyers this year and can also be considered internationally marginalised.
The merger of Barrick and Randgold was announced on the eve of the gold conference and UBS observes many corporates and investors have, therefore, suggested a period of consolidation among the mid-cap sector may be looming, with potential to do scrip-based mergers rather than cash deals.
UBS also notes a number of companies were concerned that the market was not recognising the value of their assets, production or earnings outside of top jurisdictions such as the US, Canada and Australia. Examples the broker cites include Alacer Gold ((AQG)), Alamos and Eldorado which remain positive about projects in Turkey but are trading at levels below their peers because of perceived sovereign risk.
Perhaps, UBS speculates, if their value is not recognised by the market these stocks may present an opportunity for a major company, which could disperse the perceived risks via diversity of operations.
Australian Gold Stocks
JP Morgan observes there is lingering optimism among North American corporates which does not reconcile with their cash flows or equity performance, unlike the Australian stocks which have strong stories to tell.
The broker believes marginal investment dollars should be allocated to Australian companies which are trading on 4.5-6x enterprise value/operating earnings (EBITDA) ratios and have net cash positions on their balance sheets.
Australian gold companies are in strong demand, JP Morgan observes from the gold forum, but still do not command the spotlight in the North American investment community. The common theme among Australian gold stocks is sector-leading cash flow and organic production growth.
Northern Star Resources ((NST)) discussed its Pogo acquisition, believing this to be a transforming asset. The company intends to release an updated resources statement shortly, while accelerating infill and exploration drilling. Meanwhile, Regis Resources ((RRL)) has indicated it will not pursue the acquisition of Capricorn Metals ((CMM)) as the largest shareholder has rejected the offer.
The TSX-listed Lundin Gold, in which Newcrest Mining ((NCM)) has a 27% interest, has indicated construction on schedule and the processing plant is 30% complete. Commercial production is targeted for May 2020. Evolution Mining ((EVN)) also presented a solid investment story at the conference, JPMorgan observes.
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