Credit Suisse Looks For Gold Prices, Mining Stocks To Rise
Editor's Note: Kitco News has officially launched Outlook 2019 - Rush To Safety - the definitive reference for precious metals investors for the new year. We chose this year's theme as financial markets face growing uncertainty. With volatility on the rise, how do you protect yourself? Click here daily to see updated content.
Supportive influences include a U.S. dollar that should peak and reverse course, declining bond yields, potential for more turbulence in the stock market, exchange-traded-fund inflows, and continued central-bank buying, Credit Suisse said. As gold prices rise, analysts look for mining equities to follow.
Gold fell for much of 2018, which the bank blamed on rising interest rates and a muscular U.S. dollar, before bouncing in the last few months of the year.
“Our view on gold in 2019 remains bullish due to a number of fundamental and technical factors…,” Credit Suisse said. “An overarching factor that is supportive of gold prices is the prevailing risk-off sentiment with investors increasingly flocking to gold as a relative safe haven amid volatile equities, and should markets remain turbulent in 2019, we would expect gold to extend its recovery.”
The bank cited signs of a peak in the U.S. dollar, which is important to gold since the yellow metal tends to move inversely to the greenback.
“This is underpinned by a growing view that the U.S. Fed will be challenged to further raise interest rates without slowing down the economy, as well as concerns twin deficits are deteriorating,” Credit Suisse said. “The consensus view is that the Fed will raise interest rates twice next year (down from three times), pushing the rate to 2.75-3% by 2019-end, but this could prove aggressive if the economy shows signs of slowing down. Also, dollar bull markets typically don’t last more than seven years and we are already in the eighth year of the current bull market.”
Further, real bond yields are potentially topping out, the bank continued.
“A good sign for gold investment demand is that fund flows for gold ETFs have recently turned positive and we expect this trend to persist as other asset classes are volatile and appear less attractive,” Credit Suisse said.
Like the precious metal itself, gold equities sold off during 2018. However, this presents an “attractive entry point, particularly for equities with favorable valuations,” Credit Suisse said. Analysts said they prefer companies investing in growth through lower-risk projects.
“Production and reserve growth in the sector have slowed the past few years and companies are having a harder time replacing depleted ounces,” Credit Suisse said, pointing out that precious metals reserves are down by around 14% since 2014.
“We therefore prioritize companies with strong production pipelines, though we prefer low-risk growth (e.g., brownfield expansion over greenfield, mining-friendly jurisdictions, and advantaged cost profile). We make this important distinction because some gold companies have invested in a plethora of exploration projects but these projects present higher execution risk and are less likely to reach development stage in our view.”
The bank’s top picks are Iamgold Corp. (TSX: IMG; NYSE: IAG) and Agnico Eagle Mines Ltd. (NYSE, TSX: AEM). Analysts look for Iamgold to break out given its depressed valuation, high leverage to the gold price and strong growth profile. They described Agnico Eagle as having a “strong, low-risk exploration and project pipeline, underpinned by its growing Nunavut platform, as well as a proven management track record.”
Credit Suisse analysts said they see potential for more mergers and acquisitions among gold-mining companies in 2019.
“As new reserves become increasingly scarce, producers will be forced to combine operations to replace depleted reserves and achieve economies of scale,” they said.
In particular, companies with cheap valuations could become takeover targets, especially those with only one or a few assets that can easily be added to an existing portfolio, analysts said. The challenge of big acquisitions would be a weakening of the balance sheet, plus the fact investors have become wary of “ill-conceived” mergers in recent years, with the exception of Barrick Gold Corp.’s (NYSE, TSX: ABX) acquisition of Randgold Resources Ltd. (Nasdaq: GOLD) in an all-stock deal expected to close on Jan. 1.
“We forecast gold production for companies in our coverage to be roughly flat through 2022,” Credit Suisse said. “This has made production growth essential because companies need to be able to extend mine lives and be positioned to benefit from a return to the top of the cycle. Producers that have invested more heavily in high-quality exploration the past few years present the most upside in our view, within an industry that is near a record low ratio of exploration spend[ing] to revenue.”