Analysts Michael S. Dudas and Satyadeep Jain consider all things gold in their latest research note, noting the current state of the gold market and the effect of tapering and other market conditions on gold miners.
Gold and silver prices fighting the consensus view. Increasingly mixed economic data, visible continuity from the Federal Reserve Board regarding an elongated zero interest rate policy (ZIRP), a reversing trend in the value of the dollar and supportive internal physical demand and investor interest should aid price trends. We are finding that miners are aggressively restructuring their businesses for a $1100-$1200 per ounce market, which should help provide added investor comfort and fuel for a valuation recovery among mining equities. We rate AEM, CDE, GORO and NEM as Buys.
Since December’s taper announcement, gold prices have risen 11%, silver prices 14%, US Dollar index has fallen 0.4% while the broader US equity markets have gained 2%. We have argued that part of 2013’s painful price decline discounted the beginning of taper. However, the Fed balance sheet holdings are slated to exceed $4 trillion during 2014 once the Fed completes the taper.
While the gold market recovers from 2013’s financial gold liquidation and very positive physical demand, macro trends are helping to support micro trends in gold. Dollar weakness since early January has correlated with more uneven economic news. Chinese gold demand remains healthy with expectations of exceeding 2013’s record 1,200 tons while the India government wrestles with its unpopular policy of maintaining import tariffs.
Gold Price Forecast Remains Positive
During the next twelve months, we continue expect gold to average $1,300 per ounce with upside to $1,450. On silver, we peg a low $20s average with potential to reach upper $20s as supply/demand balances tighten and investor investment remains supportive.
Gold Mining Equities Overcoming Sentiment as Plans Change
Year end reserve profiles and financial results indicate gold managements focusing on running their businesses in a $1100-$1200 gold price environment. Cost, capital profiles and mine plans have been adjusted to reflect lowered expectations and growth. As mining managements continue to communicate with investors, these successes and goals show a more sustainable business model going forward; we believe the gross underperformance of 2012-13 can be reversed.
Gold Mining Shares up 22% year-to-date as evidenced by the Philadelphia Gold and Silver Index (XAU). We rate Agnico Eagle Mines Ltd (NYSE:AEM), Coeur Mining Inc (NYSE:CDE), Gold Resoruces and Newmont Mining Corp (NYSE:NEM) as Buys, with Barrick Gold Corporation (NYSE:ABX), Hecla Mining Company (NYSE:HL) and Pan American Silver Corp. (NASDAQ:PAAS) rated Neutral.
Risks to our Expectations include accelerating deflationary trends, stronger U.S. dollar, lower energy prices, faster than expected central bank withdrawal of liquidity, margin squeeze from cost pressures, disappointing reserve write-offs and investors continuing to accord a lower relative multiple to gold equities.
While developed and emerging economy monetary stimulus, global investor perception
regarding currency values, supportive central bank purchases and direction have shifted, we
believe gold prices should rebound after repairing technical damage. North American-based
precious metal producers which focus collective attention toward capital discipline and
operating cost maintenance should better reflect in relative valuation an increased value placed on gold despite fighting geologic, metallurgy, capital cost and political challenges, especially after recent underperformance.
We continue to recommend Newmont Mining Corp (NYSE:NEM) among large capitalization producers, Agnico Eagle Mines Ltd (NYSE:AEM) among mid-cap gold companies, Coeur Mining Inc (NYSE:CDE) among silver-oriented miners, and Gold Resource Corporation (NYSEMKT:GORO) among small cap gold producers. We believe accelerating deflationary trends, a stronger U.S. dollar, global central bank withdrawals of liquidity and a reversal of net bullion purchases, a higher level of positive real interest rates, further delayed timing of development projects and higher-than-expected cost pressures could impact our valuation views.