Gold received a sell recommendation from Goldman Sachs yesterday. ‘Surprisingly‘, SocGen is also lowering their price target for the precious metal. SocGen has decreased their gold price estimate from $1,800 to $1,500/oz and silver price from $30 to $27/oz, to bring our models into line with SocGen’s commodity team’s new (bearish) forecasts for gold, and to a lesser extent silver, prices.
Price headwinds
Rising interest rates and a stronger dollar on US recovery
SocGen economists believe that 2013 will see an inflection point on growth in the US Global Economic Outlook – Test-driving the recovery. Signs of recovery have already ignited the debate on QE exit. This matters to gold because an important driver of investor gold behaviour is the perception of inflation risks, and the precious is generally seen as a good hedge against the debasement of fiat money.
Throughout the period of QE inflation has remained low (and US inflation has been trending lower since late 2011), and now SocGen believes we are beginning to see the economic conditions that justify an end to the Fed’s QE, while the US dollar has started trending higher. It seems unlikely that investors would want to add to their long gold positions in this context. If so, the gold price should trend lower as the physical gold market is seriously oversupplied without continued large-scale investor buying. SocGen forecasts the price to fall below $1400 by year end and to continue to trend lower next year.
The central scenario assumes continued QE out to the final months of 2013, albeit at a slower pace in the fourth quarter. And once the Fed signals an end or scaling down of bond purchases Treasury yields are likely to bottom out and begin their gradual normalisation. The metal has no yield, so the opportunity cost of holding gold decreases with a decline in real interest rates and increases with a rise in rates. If history provides guidance, returning to positive ‘real rates’ would create significant headwinds for gold.
Target price downgrades For the 10 stocks under coverage the average cut price target is 30%. However, this does to some extent represent a catch-up; the gold price has dropped by more than $200 from the recent high of $1,791.75 reached on 4 October 2012. Their EPS forecasts are on average now 56% below consensus for 2013, and 50% below for 2014.
Sector recommendation The upside for gold equities has been embedded in consensus numbers for a good while now. This is partly due to analyst inertia. Over the past two years the major gold indices have underperformed the gold price by around 40%, eroding P/NPV market multiples. Indeed, late last year the prospects for the sector in 2013 looked much brighter. Valuations looked relatively attractive and managements were promising better capital discipline, higher hurdle rates for projects, and a refocusing on core assets, growth through exploration over M&A, and so on. Since then weak outlook statements with warnings of high unit cost inflation, coupled with a falling gold price (down $75 YTD) have left the main gold indices ca. 24% lower so far this year.
Main stock picks The changes SocGen is making to their ratings include downgrading IAMGOLD Corporation (NYSE:IAG) (TSE:IMG) and Centamin PLC (TSE:CEE) (LON:CEY) (PINK:CELTF) from HOLD to SELL and AngloGold Ashanti Limited (ADR) (NYSE:AU) from BUY to HOLD. Their top pick in the sector remains Randgold Resources Ltd. (ADR) (NASDAQ:GOLD), based on its credible growth profile and relatively strong cost control, as the volume growth is partly driven by improving grades.
