(Kitco News) - Gold prices continue to struggle in the face of persistent inflation pressures and growing expectations for higher interest rates; however, one bank continues to see short-term weakness as a buying opportunity and expects higher gold prices to continue to support the mining sector.
Despite rising energy costs, market analysts at Jefferies said they expect the mining sector's third-quarter earnings season to be "okay," as input cost pressures have remained relatively manageable.
In their latest metals and mining report, published Friday, the analysts said that although higher bond yields have created significant headwinds for gold, they remain bullish on the precious metal over the longer term, and expect to see higher prices through next year.
"Gold remains resilient despite near-term rate pressures. We reiterate our $5k/oz '27 forecast, as we do not believe the U.S. can tolerate materially higher yields for an extended period. Near-term volatility could mean good entry points for high-quality gold names," the analysts said.
The bullish outlook comes even as Jefferies has lowered its fourth-quarter gold price forecast to $4,400 an ounce, down from $4,600, reflecting the impact of higher real interest rates. The bank also lowered its full-year 2026 forecast to $4,511 an ounce, down from $4,595.
The analysts noted that gold has remained relatively resilient despite U.S. Treasury yields reaching their highest levels in 24 years earlier this month.
Although higher bond yields increase the opportunity cost of holding non-yielding assets like gold, the analysts questioned how long the U.S. economy and government finances could withstand elevated borrowing costs.
Jefferies pointed out that the U.S. government is running an annual deficit of approximately $2 trillion, representing about 6% of GDP, while annual net interest expenses have surpassed $1 trillion.
The analysts argued that growing fiscal pressures could eventually force policymakers to take measures to contain borrowing costs, potentially creating a more supportive environment for gold.
At the same time, Jefferies said that persistent inflation, growing government debt, currency debasement and continued central bank demand remain important long-term drivers for the precious metal.
Reflecting this longer-term optimism, the bank raised its 2029 gold price forecast to $4,600 an ounce, up from $4,500, and increased its long-term price assumption to $3,600 an ounce, up from $3,500.
While the bank expects gold prices to remain volatile in the near term, the analysts said that the precious metal's underlying strength should continue to support mining companies, even as producers face higher operating costs.
According to Jefferies, the mining sector has navigated several challenges during the third quarter, including higher fuel costs, mine sequencing, maintenance, stripping activities and weather-related disruptions.
The analysts noted that diesel prices increased approximately 12% during the quarter, while average gold prices declined 6%, from $4,516 an ounce in the second quarter to $4,263.
Although the combination has squeezed profit margins, Jefferies said that the impact has been relatively modest, with mining margins remaining well above historical averages.
The bank also expects aggregate free cash flow per ounce to increase during the third quarter, largely because of lower tax payments compared with the second quarter.
However, Jefferies warned that higher labor costs could become a growing concern for the sector. While mining companies have generally characterized rising diesel costs as manageable, the analysts said that labor inflation is increasingly being discussed by management teams.
Despite these pressures, the bank expects a stronger fourth quarter as temporary production disruptions ease and mining operations improve.
More importantly, Jefferies sees the potential for a significant improvement in mining profitability next year if gold prices rise toward its $5,000 forecast.
The bank's projections show free cash flow margins increasing sharply in 2027, suggesting that higher gold prices could more than offset persistent operating cost pressures.
Jefferies' bullish outlook comes as gold-mining equities have recently lost some momentum compared with the underlying precious metal.
The report noted that the VanEck Gold Miners ETF experienced approximately $1 billion in outflows during September, reversing some of the investment demand seen earlier in the year.
Nevertheless, the analysts said that the sector's underlying profitability remains strong, and they continue to favor high-quality producers as gold prices consolidate.
"We remain constructive on gold and view the recent pullback as an attractive entry point," the analysts said.
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