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Gold prices would be doing better in current environment if it wasn’t for cryptocurrencies – Credit Suisse

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(Kitco News) - The gold market continues to trade near a five-month high and despite its recent breakout rally, one international bank said that current prices are still disappointing.

In a report published Thursday, analysts at Credit Suisse said they were lowering their 2022 price forecast for the precious metal. The Swiss bank sees gold prices averaging next year around $1,850 an ounce, down 2.6% from their previous forecast of $1,900 an ounce.

Analysts Fahad Tariq and Jessica Xu, authors of the latest report, said that there is a disconnect between gold prices and bond yields.

“The 10Y U.S. TIPS yield (i.e. real rate) remains deeply negative at - 1.10% at the time of this writing,” the analysts said. “Based on our two-factor model - TIPS yield and USD index - the implied gold price is ~$1,910/oz vs. ~$1,863/oz spot.”

Real bond yields have dropped sharply in the last two weeks as the Federal Reserve has signaled that it is not ready to raise interest rates anytime soon and as inflation pressures have picked up. The October U.S. Consumer Price rose 6.2% for the year, its biggest increase in more than three decades.

Although bond yields have supported the gold prices, Xu and Tariq noted that the precious metal faces growing competition from Bitcoin and other cryptocurrencies.

“There have been instances of significant positive price movement for Bitcoin, and on those days, gold typically trades lower or lags, though the overall correlation is positive,” the analysts said. “Given the prevailing macro factors (i.e., low rates, high inflation), we would have expected gold to be trading higher were it not for cryptocurrencies serving a similar inflation-hedge function for some investors.”

While gold prices have maintained critical support levels following its recent breakout, Bitcoin has seen its bullish momentum wain in recent days. Monday, the leading digital currency dropped 5% after reaching a new record high the previous week.

Further selling pressure in Bitcoin has pushed the price below $60,000 per token, a critical support level for some market watchers.

While Credit Suisse is lowering its price forecast for gold next year, the firm remains extremely bullish on the mining sector.

The analysts said that gold miner valuations are trading below levels seen in the last bull market, even as the sector has seen cash flow and balance sheets strengthen.

The company said that its top picks are: Agnico Eagle (NYSE: AEM, TSX: AEM), Newmont (NYSE: NEM), and Endeavour Mining (TSX: EDV). Credit Suisse also looks for Kinross (NYSE: KGC, TSX: K), Barrick (NYSE: GOLD), Triple Flag (TSX: TFPM), and Yamana (NYSE: AUY) to outperform.

Looking deeper into the mining sector, the analysts said that mergers and acquisitions will remain an important theme in 2022.

“We think the trend of senior gold producers acquiring single asset companies in Canada will persist, as well as consolidation among intermediate gold producers,” the analysts said. “The impetus for intermediate gold producers to combine is scale, relevance, cost synergies (particularly important in the current inflationary environment), and reserve replacement. At this time, we do not think the significant costs associated with meeting emissions targets will be the main factor driving industry consolidation.”

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