RBC Calling For $1,500 Gold For 2017, 2018
By Kitco NewsFriday July 15, 2016 09:42
(Kitco News) - In a world of rising gold forecasts, RBC Capital Markets is setting itself apart from the herd as it releases one of the most aggressive updates, saying a new bull market is under way.
In a report published earlier this week, analysts at the Canadian bank said that they are increasing their 2017 and 2018 gold forecasts, expecting prices to rise to $1,500, up from the bank’s previous forecast of $1,300 an ounce. However, the bank sees prices declining to $1,300 an ounce by 2020.
“We maintain our positive outlook for gold in the current environment, given the elevated geopolitical risk in the U.K./euro zone, increasing systemic risk with increasing negative yields for government bonds and the Fed likely to pursue a more dovish monetary policy,” the analysts said in the report.
The analysts noted that global bond markets and negative real and nominal interest rates are having the biggest impact on gold prices, with more than $10 trillion in global sovereign debt now yielding negative returns. They noted that real U.S. interest rates at -0.42% suggest a gold price of $1,359 an ounce; however, if real rates fall to -1%, that would imply a gold price of $1,546 an ounce.
RBC remains optimistic on gold as investors continue to pile into gold-backed exchange-traded funds. They note that the ratio of daily net inflows versus daily outflows is about 8:1.
“We believe that the sharp increase in buying volumes indicates appetite for sticky, fundamental demand in the gold space, and that this should provide a support for a higher gold price as investors continue to buy any pullbacks,” the analysts said. “The influx in ETF demand in 2016 is also approaching the record level of 662 tonnes seen in 2009, as investors seek gold as a store of value and hedge against negative real rates.”
While the Canadian bank is bullish on gold, the analysts also see more potential in the mining sector.
The bank said, “We reiterate our view that investors should look to gold equities for exposure to gold, especially given the increasing free cash flow generated in the current gold price environment.”
While gold prices have risen more than 25.5% since the start of the year, the mining sector, measured by the Market Vectors Gold Miners exchange-traded fund (NYSE ARCA: GDX), is up almost 114%. The junior mining sector has seen even stronger upside with the Market Vectors Junior Gold Miners ETF (NYSEARC: GDXJ) up more than 151% so far this year.
“We recommend that investors focus on operating companies with attractive margins, solid balance sheets, organic growth opportunities and a consistent operating strategy,” the analysts said. “Our technical outlook suggests that the next gold bull market is under way, and any weakness is viewed as a buying opportunity.”
By Neils Christensen of Kitco News; nchristensen@kitco.com
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