Commodities | Jun 17 2020
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How will the re-opening of economies amid loose monetary policy and fiscal stimulus affect the gold price trajectory?
-Equity market rally could slow gold buying in the short term
-Narrowing gap between gold and gold stock trajectory
-Gold rally probably has more to run
By Eva Brocklehurst
What is the outlook for gold? Several brokers continue to be bullish on the yellow metal, despite the resurgence of equity markets. If fears of a second wave of the pandemic in either Beijing or the southern US depress sentiment, or the re-opening of economies is delayed, then gold could definitely break out of its current range, Macquarie points out.
Meanwhile, US Federal Reserve chairman Jerome Powell has signalled there will be no change to the US Fed Funds rate until at least the end of 2022. This was interpreted to be positive for gold, although UBS asserts weakening safe-haven demand, as markets rally, could slow buying in the short term and limit upside.
Still, Macquarie suspects conditions are ripe for gold to push higher, noting gold has been in a US$1670-1740/oz range since April, emphasising gold's ability to rally during equity bull markets.
The broker considers it unlikely the Fed will deliver a "Goldilocks recovery" into 2021 and, if growth disappoints or the Fed deliberately overdoes liquidity, real yields could come under pressure. Macquarie assesses the Fed will opt to do too much rather than too little, and ultimately lift inflation expectations.
While acknowledging gold has potential to overshoot, the broker points out its current outperformance, on a long-term basis, does not appear excessive. In a bull market, gold is expected to rally beyond fair value as investors increase exposure.
Once again, Credit Suisse finds it is updating 2020-22 gold price forecasts amid supportive fundamentals. These factors include low and negative yields, a weakening US dollar and belief that significant fiscal stimulus will be, ultimately, highly inflationary.
The broker expects gold to peak at US$1800/oz in 2021 but prices could exceed this if US TIPS (Treasury Inflation Protected Securities) decline to sub-100 basis points, which is considered a plausible scenario. This correlates to a gold price over US$2000/oz, Credit Suisse calculates, if the historical relationship holds.
Gold is a good hedge against rising global debt levels and geopolitical risks and, besides being long on the metal, UBS believes investors could also consider selecting gold miners for equity exposure.
Macquarie favours, among established producers, Saracen Mineral Holdings ((SAR)) for its production growth and Evolution Mining ((EVN)) as a low-cost producer. In junior miners Westgold Resources ((WGX)) is preferred for operating leverage and Bellevue Gold ((BGL)) for development and exploration potential.
Shaw and Partners also looks at the correlation with gold for Australian gold equities and highlights some divergence. This is most notable in Newcrest Mining ((NCM)), which has diverged sharply relative to the gold price. This gap should close as the business improves its operations and news flow on exploration.
Shaw suggests patterns in divergence typically diminish once operational, financial and hedging issues are addressed by the relevant miners. Recent price consolidation is interpreted to mean gold equities will build "fresh new higher lows".
Credit Suisse prefers Northern Star Resources ((NST)) and Evolution over Newcrest. Northern Star is assessed to have the best value in the large gold stocks, trading at an -11% discount to the broker's base valuation.
Moreover, this is the only pure gold play, as both Newcrest nd Evolution have material copper revenue. The diversified portfolio of Evolution Mining is attractive, the broker acknowledges and there is strong free cash flow and growth potential.
Credit Suisse expects Newcrest's portfolio development will be a multi-year prospect with higher capital deployment and uncertainties prevailing The broker notes Regis Resources screens well on valuation but part of the value remains underpinned by the McPhillamys project which is yet to receive all permits.
The broker is yet to fully value the portfolio of the proposed merger between Alacer Gold ((AQG)) and SSR Mining while Perseus Mining ((PRU)) is considered fair value.
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