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BMO continues the debate between gold vs. gold miners

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(Kitco News) - The precious metal mining sector might represent more value for investors than the precious metal itself, according to the latest report from Bank of Montreal.

However, they also added that there is no need to rush out of the raw commodity.

"Although tapering is all but certain, with real yields set to remain negative, we see no overwhelming reason for aggressive rotation away from gold. As usual, we expect Denver to involve discussion of the relative benefits of equity exposure versus physical gold investment," said the BMO analysts.

The latest comments from BMO Capital Markets come as the global mining sector gathers in person for the first time in nearly two years at the Denver Gold Forum.

Although gold prices are below $1,800, down about 6% so far this year, BMO analysts said that the current price still represents good value for the mining sector as they see strong cash flow for the foreseeable future.

"There is no doubt we are in an interesting period for gold, as the Federal Reserve edges toward tapering and eventual rate rises, while producers face the relatively rare challenge of deciding what to do with the strong cash flow currently being generated," said the analysts. "Much investor scrutiny and Denver Gold discussions will remain concentrated on what will be done with this windfall, as miners continue to balance the tug-of-war between near-term capital returns and production growth. Investors' cautious stance toward companies investing in the long-term pipeline, consistent since 2017, has started to thaw at the edges. Overall, however, calls for improved returns remain the loudest voice in the room at present."

While gold prices could continue to struggle as the Federal Reserve looks to shift its monetary policy by reducing its monthly bond purchase, the Canadian bank is not expecting to see a significant selloff in gold.

"Whilst we still expect a further slowing of asset purchases toward the end of the year to act as a headwind for gold prices, with negative real yields, high geopolitical tensions and potential for wider market volatility, we see the potential for a sharp correction in gold (a la 2013) as relatively low," the analysts said.

While gold prices are expected to remain subdued, costs are another important trend BMO are watching that will impact the mining sector.

"Historically, when gold prices go up, costs follow in lockstep. In the past, this dynamic has caused investors to question the industry's discipline. Now, miners seem determined to keep a lid on costs. This is ultimately proving to be a challenge this year with miners battling inflationary pressures largely beyond their control," the analysts said.

The analysts noted that a large, fragmented market and dwindling production means there is an even greater focus on miners' balance sheets and spending discipline. Looking at the market, BMO noted that there are double the amount of companies producing more than 500,000 ounces compared to the last 20 years.

"While consolidation and partnerships have been at the fore among major producers, the spillover to the next level has been lacking," the analysts said. "The top 10 largest gold miners are expected to account for ~26% of total gold mine supply in 2021, whilst the largest 10 copper producers are forecast makeup 42% of mine supply. Gold lagging behind peers in consolidation could be one of the reasons investors still have some doubt as to the current supply discipline holding."

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