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Gold fundamentals 'have never been stronger'; higher prices ahead - CFRA

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(Kitco News) - Investment research firm CFRA is bullish on gold, saying the macroeconomic backdrop may be the strongest ever amid the global COVID-19 pandemic, with higher prices also boding well for the bottom lines of producers.

As of mid-morning Wednesday, Comex June gold was already up 12% for the year to date to $1,716.90 an ounce, a contrast to the year-to-date losses in other commodities.

“Gold fundamentals arguably have never been stronger, as the COVID-19 pandemic (and the depressing reality of its economic damage) has led to an unprecedented amount of quantitative easing across the globe,” said the report, released this week and written by equity analyst Matthew Miller.

The research firm said the rally in gold “has only just begun” and shares of mining companies are “the best way to play an appreciating gold price” due to their leverage against movements in the price of the yellow metal.

“In our view, gold is the best hedge against economic uncertainty in general and, more specifically, against fiscal deficit, negative-yielding bonds, fiat currency debasement and potential inflation,” the report said. “Although equity markets are attempting a strong bounce-back from the steep declines in the first quarter, there is a disconnect between the current recovery and the economic reality and the recent strength in equities could be underestimating the risk of a subsequent outbreak of COVID-19 after economies restart.”

Employment has collapsed, while many businesses face insolvency, the report said. The large number of publicly traded companies that have pulled their 2020 guidance underscores the high level of economic uncertainty going forward, CFRA said.

Unprecedented quantitative easing is also bullish for gold, CFRA said. The U.S. Federal Reserve’s balance sheet has undergone its fastest and largest expansion over the past two months, and policymakers will likely need to do more to stimulate the economy, with potential for bond yields to fall some more, the report said.

Meanwhile, as gold prices rise and mining costs remain stable, producers should be able to generate meaningful free cash flow, CFRA said. All-in sustaining costs should remain stable, helped by a decline in oil and chemical costs. Meanwhile, as of the CFRA report, the average price so far in 2020 of $1,618 an ounce was $214 more than the 2019 full-year average.

“Given the high level of uncertainty, our range for the forecasted year-over-year change in 2020 AISC is from a decline of $10 to an increase of $75. We expect the average gold price for the full-year 2020 to be at least $300 above 2019 and therefore, every ounce produced will generate incremental pre-tax earnings of approximately $225 to $310.”

Against this backdrop, gold producers should be able to post earnings and revenue growth in 2020, the report said. This is a contrast to most sectors of the economy that have been hit by stay-at-home orders from government officials trying to combat the spread of COVID-19.

“Gold miners, on the other hand, are in an enviable position, with an appreciating gold price; mostly stable production targets; lower diesel, chemical, and other costs; and very strong balance sheets,” the report said.

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