Commodities | May 31 2012
– Macro concerns impacting on gold price
– Gold has outperformed precious metal peers
– Central bank buying a major influence on gold market
– Goldman Sachs highlights some keys for gold equities
– Barclays prefers palladium among PGMs
By Chris Shaw
For May to date gold prices are down 3%, a fall that follows two months of consecutive declines. National Australia Bank attributes much of this to further bouts of investor risk-off behaviour given ongoing concerns over Europe's debt issues.
As NAB notes, recent data showed gold demand continued to soften in the March quarter, though demand overall has been reasonably resilient to what remain relatively high prices. NAB forecasts a June quarter average gold price of US$1,610 per ounce.
Beyond this the bank suggests gold prices may then struggle, as upside risks to prices dissipate as the outlook for the global economy strengthens. This should see the US dollar strengthen, so shifting demand away form gold and towards currency-based investments.
Medium-term, NAB's quarterly average gold price forecasts stand at US$1,550 per ounce in September and US$1,500 per ounce in December, falling to US$1,420 per ounce at the end of the June quarter next year and US$1,340 per ounce in the December quarter of 2013.
Despite gold's recent falls, Deutsche Bank notes gold has continued to outperform others within the precious metals complex. This trend is expected to continue given ongoing downside risks to the global growth outlook.
In terms of positioning, Deutsche notes the speculative community is returning to its lowest exposure to gold since 2008. This trend may be close to running its course, as Deutche expects US interest rates will remain at negative levels and US dollar rallies, which are a negative for the gold price, appear to be based on weak foundations.
Contrary to NAB (see above), Deutsche continues to forecast increases in the gold price in coming years, its annual average price estimates standing at US$1,825 per ounce this year and US$2,000 per ounce in 2013.
A major trend in gold markets in the past few years has been central bank buying. In 2011 central banks around the world bought more gold than any year since 1964 and they have been solid net buyers of the metal in each of the past two years. While the reason for the buying – a lack of significant gold reserves, makes sense, RBS questions the timing since the buying coincides with the gold price trading near all-time record highs.
As RBS notes, the past decade has demonstrated how gold plays a role for central banks as a portfolio of reserve diversifier, but the purchases over the last year or so suggests some of the buyers are now well in the red in terms of price paid to lift their gold exposure.
While price is less important for central banks given the benefits of risk diversification, RBS suggests the fact central bank gold purchases are structural and based on long-term decisions means purchases could be postponed to a time when lower purchase prices could be achieved.
The World Gold Council's quarterly update was a mixed bag in the view of Goldman Sachs, as while industrial demand was generally down given some price sensitivity, the official sector continued to be a net buyer. This net buying showed little in the way of consensus, Goldman Sachs pointing out neighbouring countries in Asia, which tends to be a large gold consuming region, showed varied results.
In the view of Goldman Sachs, macro events in Europe and the US are likely to support the gold price at least until US real interest rates turn positive. This implies a solid backdrop for the gold price until at least the middle of 2014. Gold price forecasts for Goldman Sachs suggest mid-2014 will be an inflection point, after which prices will decline by around 10% annually until the broker's long-term price forecast of US$913 per ounce is achieved in 2017.
But while Goldman Sachs remains positive on the gold price outlook, volatility in the metal's price has impacted on investor sentiment with respect to gold equities. Not helping is a stronger correlation between falls in gold prices and gold share price than corresponding rises.
For gold producers a growing issue remains high costs, leading Goldman Sachs to suggest there are four steps to outperformance for companies in the gold sector. These are to deliver operationally and on cost control on current and future projects, to offer a yield to investors, to replenish resources and reserves and to generate earnings growth via volume increases.
Using such criteria as a base, Goldman Sachs has Buy ratings on Regis Resources ((RRL)), St Barbara ((SBM)), Kingsgate Consolidated ((KCN)), Teranga Gold ((TGZ)) and Medusa Mining ((MML)). In contrast, Newcrest ((NCM)), OceanaGold ((OGC)), Perseus Mining ((PRU)), Evolution Mining ((EVN)) and Alacer Gold ((AQG)) all score Neutral ratings.
With respect to platinum group metals (PGM), Barclays Capital suggests while prices have been weighed down by macro uncertainty, the fundamentals point to a more positive outlook. Barclays notes the Johnson Matthey Platinum Review 2012 highlighted a number of positive trends for the PGMs, including a likely swing into deficit for palladium and a smaller surplus for platinum than in 2011.
But Barclays also sees some factors that could impact on metal balances, including the growing importance of recycling. As well, Johnson Matthey pointed out inventory releases should supplement mine production this year, which is important given rising production costs continue to suggest a difficult mining environment.
A positive should be the implementation of the next leg of emission standard in Europe, which should boost platinum at the same time as ETF flows for PGMs have turned positive and Russian stock releases are being scaled down.
For Barclays this implies tighter PGM markets this year. Given an expected deficit for palladium this year the metal is the preferred PGM exposure of Barclays.
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