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ANZ says gold could breach US$1,700/oz as central banks expected to keep buying

Modeling by Australia's ANZ Research suggested gold could breach US$1,700 per ounce within six months, while London broker Bernstein is seeing the "remonetization of gold" and the "weaponization" of the U.S. dollar, which will ensure that central bank buying will continue for some time.


ANZ made the call in an Oct. 22 note that also suggested gold is "relatively inexpensive at the moment" given the gold-to-Dow Jones Industrial Average ratio is around 0.06, a level that in the past has "preceded a rally in gold prices and a retracement in the stock market."


The bank also compared gold prices with the Consumer Price Index, using 1990 as the base year, and found that the real gold price reached US$1,000/oz in 2012, though that was significantly lower than the nominal gold price of US$1,800/oz and slightly lower than the real gold price in 1980.


This suggests that gold generally preserves its value proportionate to the inflation number, ANZ said, and considering that gold prices have been rising despite lower inflationary expectations, this strengthens the bank's conviction that gold "still has upside price potential once inflation starts picking up amid the interest rate easing cycle."


Meanwhile, Bernstein said in an Oct. 23 note that the present moment is "exceptional" in that "access to dollar liquidity and the ability of the U.S. to withdraw this in the furtherance of political objectives has effectively eliminated the risk-free status of holding U.S. dollars." Bernstein cited the recent sanctioning of Rusal and Iran as opening a "monetary Pandora's box."


Bernstein said the other unique feature of the current environment is the Bank for International Settlements' Basel III rules, whereby gold will now be treated as a Tier 1 asset, and the Bank for International Settlements will recognize central banks' holdings of physical gold as a reserve asset equal to cash.


Thus, in an environment where the U.S. dollar is "no longer simply the global medium of exchange but has become effectively weaponized," Bernstein said, "[I]t is hard to believe [central banks increasing their gold holdings] will be a short-lived phenomenon" as they have bulked reserves by more than 700 tonnes since the start of the year.


Amid the current reporting season, Australian broker Morgans said in an Oct. 24 note on Newcrest Mining Ltd. that "gold should be part of every balanced portfolio as it acts as hedge against 'Black Swan' events."


The firm therefore retained a "hold" recommendation on the stock, which "acts as a proxy to gold for many Australian investors," given the company's status as the largest gold producer on the ASX, despite the miner reporting a drop in third-quarter production by 23% from the previous quarter as well as higher all-in sustaining costs.


Though Newcrest's performance at all operations is expected to improve for the rest of 2019, Morgans believes that the miner is more likely to deliver at the lower end of full-year guidance due to its slow start.


In a different perspective on the current reporting season, new analysis from Canada's BMO in an Oct. 24 note found that gold miners would trade more competitively versus copper and diversified miners when modeling gold and copper price estimates following the same trajectory.


From current spot prices of about US$2.60 per pound, BMO's price assumptions have copper rising 25% to US$3.25/lb by 2025. In contrast, BMO's analysts said, "[W]e are at peak gold price assumptions with our outlook eroding 20% from spot gold around US$1,490 per ounce to US$1,200/oz long term."


"To put it another way, what if we were to have an outlook for gold that was similar to copper? The answer, our long-term gold price would rise to $1,863/oz, 25% above our current forecast of $1,200/oz," BMO said.


From this analysis, BMO concluded that "Outperform"-rated AngloGold Ashanti Ltd., B2Gold Corp., Gold Fields Ltd. and Newmont Goldcorp Corp., along with "Market Perform"-rated Kinross Gold Corp., stand out when looking at the enterprise value-to-EBITDA ratio.


"At spot and Cu Strip scenarios the gold miners on average have the potential to deliver superior free cash flow yields," BMO said.

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