Commodities | Jun 27 2013
– Gold price forecasts cut
– Little upside despite physical demand
– Gold stock target prices cut
By Greg Peel
Gold has struggled to establish its identity as a safe haven asset and is unlikely to soon, says CIMB Securities. Meanwhile, recent strength suggests the US dollar has clearly not lost its status as the world’s reserve currency, despite predictions in the wake of the GFC that excessive debt and unprecedented money printing would indeed bring about the demise of the greenback.
Despite a massive injection of liquidity across the globe, inflation expectations have remained well contained and thus gold prices had remained relatively stable over 12 months when most in the market anticipated inevitable ongoing gold price strength. With gold having failed to play to script, the first sign of stimulus withdrawal, in the form of initial Fed tapering hints, signed gold’s death warrant. The US dollar gold price has fallen 28% year to date, while silver has fallen 38%.
The cost of holding a non-yielding asset such as gold when yields are rising has increased significantly, suggests CIMB, with the spectre of rising interest rates now in sight. The analysts have moved to a Neutral weighting on gold. They would have moved to Underweight but for persistently strong demand for physical gold from traditional jewellery buyers and from emerging market central banks, as well as the price correction which has priced much of the impact of rising rates in already.
Gold tried to breach the US$1800/oz mark on a renewed push to the highs in October last year but failed. Since then, Comex long positions have fallen 40% and short positions have increased by 369% to 11.9moz, notes CIMB, to a level not seen in 20 years. The trickle out of gold exchange-traded funds (ETF) which began at the beginning of the year has turned into a flood. Outflows have totalled around 16moz.
On the other side of the coin, Asian demand for physical gold has picked up considerably as gold prices have collapsed, to the point at which the Indian government has attempted to restrict gold imports lest the rupiah be threatened. Imports have flooded into China unabated nevertheless, and the increasing availability of investment products has underpinned demand, CIMB reports. The central banks of countries such as Russia, South Korea, Kazakhstan, Sri Lanka and Paraguay have all increased gold reserves.
No doubt China’s central bank has been soaking up local production as well, as it has done since the GFC, but we are not granted an insight into those amounts. Meanwhile, CIMB suggests the growth of physical demand is not sufficient to plug the hole left by the collapse of investment demand.
The analysts have reduced their gold price forecasts to US$1290/oz for the last quarter of 2013, down from 1400, and 1200 for the last quarter of 2014, down from 1300.
JP Morgan recently conducted its annual gold investor survey in the US and found that only 44% of investors now think gold will move higher in the next twelve months compared to 71% this time last year. Yet 60% still believe gold will move higher over three years. They perceive an initial deflation risk before an inflation risk finally emerges.
Gold fund managers expect goldmining stocks to outperform gold over three years, while resource sector analysts expect gold stocks to underperform or equal-perform gold.
A big change from JP Morgan’s 2012 survey is that the majority of investors believe goldminers’ operating and capital expenses have now peaked whereas two-thirds expected further cost inflation a year ago.
Morgan Stanley has reduced its gold price average forecast for 2014 by 16% to 1313 and for 2014 by 10% to 1300, with a long-term forecast unchanged at 1348. The broker’s new Aussie dollar forecasts are US$0.89 for 2014 and 90 for 2015, with the long-term unchanged at 93.
The downgrade in US dollar gold price expectations has a significant impact on Australian goldminer valuations, with an offset offered by the currency downgrade. Morgan Stanley has adjusted the target prices of its gold stocks under coverage on a net basis.
The 12-month share price target of Alacer Gold ((AQG)) falls 9%, Regis Resources ((RRL)) 10%, Medusa Mining ((MML)) 11%, Resolute Mining ((RSG)) 13%, Perseus Mining 21%, and Gryphon Minerals 34%.
Morgan Stanley retains an Equal-weight rating (Hold) on all bar Medusa and Perseus, which attract Overweight ratings as lower-cost producers who can still profit in a more subdued gold price environment. Morgan Stanley's sector call is In-Line.
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