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Gold's 2019 High Of $1,300 To Trigger A Year Of Consolidation In Mining - BMO

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Gold’s 2019 High Of $1,300 To Trigger A Year Of Consolidation In Mining — BMO

(Kitco News) - Gold prices will head higher in 2019, while the mining sector will see much more consolidation, according to BMO Capital Markets’ updated commodities outlook for next year.

The two main supportive triggers for the yellow metal will be a more dovish Federal Reserve and a weaker U.S. dollar, BMO analysts wrote.

“With the Federal Reserve hike stuttering as we head into 2019, and the USD relative outperformance in its final innings, we see further potential price gains in H1/19 before taking a backseat in H2/19 as the China-led industrial recovery takes place,” they said.

The report projected for gold to rise to $1,260 in Q1, then to $1,300 in Q2 and Q3, before falling back down to $1,270 in Q4.

“We remain optimistic for precious metals heading into 2019. Precious metals faced up to the brunt of 2018’s macroeconomic storm, and are now emerging from the other side scarred but well positioned for early 2019 outperformance,” the analysts said.

BMO said it views the 2018 gold price action as fairly decent, despite the metal’s prolonged drop below the $1,300 an ounce level.

“Gold pricing has actually held up very well through 2018. Considering much of the first nine months of the year saw steady USD appreciation, Fed rate rises and quantitative tightening, lower central bank purchases, persistently low inflation, weak physical demand and ETF outflows, in our view gold did extremely well to hold around the $1,200/oz floor,” the report pointed out.

But, now, as 2019 approaches, many of the downward drivers that pressured gold this year are dissipating, the analysts added.

“With increased volatility and geopolitical risk, macro asset allocation is becoming more gold positive again, while we believe much of the USD upward move is now behind us with rate hike expectations dropping,” they wrote.

One negative factor for gold prices next year could be a lack of physical demand from emerging markets, the bank forecast noted.

“[The physical demand] is down [partly] due to an expanded number of investment alternatives available in today’s market, but also because inflation remains stubbornly low, reducing the impetus to hold gold,” the analysts explained. “Should we see a return to global industrial reflation into mid-year as we expect, the rate of change for allocation to gold (and thus physically backed ETF holdings) is likely to slow.”

When it comes to silver, the bank expects to see a high of $16 an ounce next year, which is a downgrade from previous projections.

“The worry now is, having underperformed in a better market, what does silver do in weaker fundamental conditions? We have come to the conclusion that silver is never going to receive the same exposure to tactical asset allocation as gold, and hence now see long-term equilibrium as lower,” the report said. “Our silver forecasts have been revised lower over the coming two years in contrast with our expectations for gold. We have adjusted our 2019 annual average 2% lower to $15.75/oz from $16/oz.”

More M&A Activity In 2019

The precious metals sector is going to see more consolidation next year, following increased M&A activity in 2018, BMO said.

“We believe consolidation will be the industry trend for 2019. The most popular of which will be the nascent trend of producers straddling the Pacific,” the report noted.

With a “tepid gold price environment,” new explorations are no longer a priority for companies, which causes a global decline in larger producer output, the analysts pointed out.

“In order to stem this tide, it seems logical that the larger producers would deploy some of their now-improved balance sheets to acquire development assets or promising smaller producers that have run into capital constraints,” they said.

BMO’s list of possible mining companies looking to acquire includes Evolution Mining, Northern Star, Kirkland Lake, and Saracen. On the other hand, potential acquisition targets in 2019 are Atlantic Gold, TMAC Resources, Wesdome, Pretium, and New Gold.

“When we assume an all-stock deal with a 30% premium, most acquirers can transact accretively on most targets,” BMO said.

Also, BMO highlighted its preferred precious metal equities to invest in next year, advising to look at IAMGOLD, Newmont Mining and Alamos Gold “for attractive relative value,” and at Agnico Eagle, Endeavour Mining, Fortuna Silver, SEMAFO “for delivery of production growth.”

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