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The gold market and miners still look good as bond yields can't rise forever - Wood Mackenzie

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(Kitco News) - The gold market is struggling to find consistent bullish momentum as prices hold above $1,700 an ounce. However, one research firm said that investors should be a little more patient as the precious metal still can surprise the upside.

The gold market has struggled early in 2021 as bond yields have spiked to a one-year high. However, Rory Townsend, head of gold research at Wood Mackenzie, said in a telephone interview with Kitco News on the sidelines of the Prospectors & Developers Association of Canada (PDAC) virtual mining conference that he sees the rise in bond yields as a bit of a head fake and that gold prices should recover.

Despite gold's lackluster performance so far this year, Townsend said that his firm still remains bullish on gold, looking for prices to average the year around $1,825 an ounce.

"Gold has come down quite a bit from its August highs and we think this selloff is a little overdone," he said. "We just don't think bond yields will rise indefinitely. We expect to see a resurgence in gold in the second half of the year as inflation picks up."

However, regardless of what the gold market does this year, Townsend said that there is still plenty of value in the mining sector that should attract more investment capital.

He noted that even if prices fall to $1,600 an ounce, that still represents significant cash-flow growth for major producers. He added that average production costs in the mining sector are still around $960 an ounce.

"These prices, even down from August's highs, are very comfortable for miners," he said.

Although mining companies are expected to remain profitable, the disappointing gold price has taken its toll on the sector. The VanEck Vectors Gold Miners ETF (NYSE: GDX) is down 15% this year. Meanwhile, the NYSE Arca Gold BUGS Index ($HUI) is down 17% year-to-date.

As to what companies should do with their increasing cash reserves, Townsend said that there is no one solution. He explained that companies with healthy pipeline production should look to give more money back to investors; however, companies with weak growth prospects will see better value putting the extra money in the ground, he said.

"Short-term investors will be attracted to companies that are returning capital to shareholders, but long-term investors might be more interested in seeing the long-term growth potential of an exploration program," he said. "It all comes down to what kind of investor a company wants to attract and what kind of position they are in."

Ultimately, now is the time to put their money to work, he said, especially as the industry sees the supply cliff edge looming in the background.

As companies look to grow, Townsend said that he is encouraged by deals he has seen so far in this new cycle. He added that companies are not chasing any projects at any price.

"Miners are very much in expansion mode, but they are going after assets that they think could be turned into mines fairly easily. There is still a lot of cost discipline among companies and I think that will help to attract investors."

Townsend said that even though miners are enjoying unprecedented earnings, discipline is still a critical topic within the sector. He noted that companies still have to rebuild the trust that was lost in the last bull market.

"It is going to take time before investors come back to the market. Trust isn't built overnight," he said.

Along with cost discipline, Townsend said that gold companies who want to attract more generalist investors also need to keep an eye on the growing focus of Environment Social Governance (ESG) or green investing.

"Proving your green credentials as a mining company will be important to attracting new capital," he said. "If you can green up the gold coming out of the ground, that will go a long way in bringing money back into space."

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.