ROOM FOR GOLD RALLY
Shining results for metal
TORONTO Despite hovering near record prices, gold and stocks of bullion producers remain good bets, analysts say.
Expected strong third-quarter earnings by gold miners and continued support for bullion around US$1,500 an ounce because of a global environment of negative yields keeps attracting investors to the yellow metal, according to Canaccord Genuity Group Inc.
Gold is up 17 per cent year-todate, its best performance since 2010, with gold company stocks up 41 per cent, according to Toronto-based Canaccord Genuity. Bullion set a six-year high of US$1,557 an ounce last month.
Central banks have cut interest rates this year to cope with slowgrowth economies impacted by uncertainties such as Brexit and U.S.-China trade negotiations, prompting investors to seek safe havens such as gold.
“Despite the strong move, we remain bullish on gold,” says the report by lead author Carey MacRury. “With US$15 trillion in negative-yielding debt globally and amidst a global easing cycle (despite historically low rates), we believe gold is well-positioned to move higher.”
Compared to past bull markets in gold that averaged gains of 109 per cent, the current cycle shows gold is only up 48 per cent so far, suggesting it has room to increase in value, the analyst said.
Other factors in bullion’s favour are that generalist investors mostly have room in balanced portfolios to own more, the metal remains in demand by emerging market central banks and its supply likely peaked while there’s lack of investment and funding for exploration and development to produce more, Canaccord Genuity said.
Gold has also been tracking the ups and downs of the U.S.-China trade negotiations, with last week’s news of a preliminary agreement shaving off some of the yellow metal’s price.
Canaccord Genuity said a trade deal would be a temporary setback for gold price advances, and is a risk to its forecast.
However, many observers project tougher trade talks ahead when negotiations boil down to contentious issues.
“Uncertainty remains over the longer-term ramifications of the now 15-month old trade war between the U.S. and China,” Toronto-based Haywood Securities Inc. wrote in a report. “Comments by the IMF chief and the U.S. Federal Reserve Chair warned of further risks to the global economy, with the latter suggesting further interest rate cuts could be triggered in the next few months.”
But there’s a risk to the higher gold price forecast in how there’s a discrepancy in the projected extent of interest rate cuts between what the market expects — about 100 basis points over the next 12 months — and what the Fed has indicated fewer and smaller cuts. If the Fed keeps to that concept, the gold price would retreat, Canaccord Genuity said.
All this lies on top of a slowgrowth macroeconomic setting where negative yields dominate to the point that deflation is of a greater concern among developed countries than inflation.
“Gold is the sound alternative in a negative-rate world where flat currencies and government bonds are losing value in real terms,” according to the Canaccord Genuity report. “We note that yields have been falling for decades and despite the recent cyclical high, yields are back to near all-time lows.”
London-based Standard Chartered
Gold is the sound alternative in a negative-rate world where flat currencies and government bonds are losing value in real terms.
Bank believes that interest from retail investors as opposed to institutions will drive gold prices higher, perhaps to US$1,570 in the fourth quarter of next year even though exchange traded funds are nearly touching record levels.
“Although we’ve seen ETF holdings and tactical investment hitting elevated levels, like peak highs, we think retail demand is really going to be what drives the next leg higher,” analyst Suki Cooper told Bloomberg. “Retail investors almost want confirmation of further rate cuts, some weakness in the equity markets before they move into gold. The next leg higher in 2020 is going to be led by the retail side.”
James Steel, chief precious metals analyst at HSBC Securities (USA) Inc., told Bloomberg that gold will end next year at US$1,605 as easier monetary policy globally, low yields and geopolitical risks outweigh forecasts for a firm dollar and a drop in physical demand in emerging markets.
Even more bullish was a price survey of delegates at the London Bullion Market Association’s conference in Shenzhen, who predict US$1,658 an ounce in a year from now, Bloomberg reported. The group, which represents the wholesale over-the-counter market, were only a few dollars off the current price when it forecast US$1,531 an ounce last year, the news agency said.
Turning to producers, Canaccord Genuity expects many companies to double their earnings from second to third quarter when they start reporting later this month.
“We expect a step change in earnings and cash flow generation for most producers in a US$1,500/oz gold price environment,” Canaccord Genuity said. “This strong earnings growth should surpass any sector in the S&P 500 and could help attract investors into the gold space on strong earnings momentum.”
On Newmont Goldcorp Corp., the world’s largest gold miner, Canaccord Genuity issued a buy rating and increased its target price of the stock to US$60 from US$53 as the results period marks the first quarter of the combined Newmont and Goldcorp. The analyst also likes Barrick Gold for its joint venture with Newmont Goldcorp in Nevada and an improved production outlook. Canacord Genuity upgraded its rating on Barrick to buy from hold and increased its price target to $28 from $22.
The analyst kept its buy rating and increased its price target on Agnico Eagle to $98 from $87 as it raises production and trims costs. Likewise for Kinross Gold as it stays a buy and the price target rises to $9 from $8. The analyst also has buy ratings on Yamana Gold, Pan American Silver, Kirkland Lake Gold and B2Gold.