Monsters of Rock: More analysts join the gold bull team

RBC tips 2025 gold prices of US$2835/oz as latest bank to up forecasts
That’s up 31% on its April tip
Far East Capital’s Warwick Grigor warns gold investors need to look beyond prices alone and pay attention to producers’ hedge and grade profiles

RBC has emerged as the latest bank to stick a bullish forecast on gold, lifting its base case for 2024 and 2025 averages to US$2390/oz and US$2835/oz respectively.

It follows smaller market players issuing US$3000/oz predictions on gold, including Shaw and Partners.

Bell Potter’s David Coates last week told Stockhead he did not issue it as an official target, but though gold could hit US$3000/oz in the next six to nine months.

READ: Resources Rising Stars: Gold can keep flying high, Bell Potter says

RBC analysts led by Canadian based gold and natural gas strategist Chris Louney now say more records are on their way.

“So, what’s going to get us there? We think there are still investors on the sidelines who are set to make allocations to gold going into year-end and into next year. Since June, gold-backed ETP (exchange traded product) flows have mostly been on the upswing, on the way to offsetting half of the YTD outflows,” Louney and his team said in a note.

“There’s a lot of room to run and a lot of AUM that could theoretically come back as the decline began way back in the middle of last year. Even though rate cuts seem priced in in the near-term, as expectations become reality, there’s plenty of AUM that can come back.

“We’ve seen some improvements in managed money flows, increases in interest broadly, and of course the long-awaited return of inflows into gold-backed ETPs.”

That comes on top of ‘gold positive themes’ already baked into prices, like geopolitical conflict, central bank and Chinese demand, unemployment concerns and a ‘contentious’ election cycle.

Louney et. al. caution their forecasts are not at the loftiest end, saying if some of the investor cut-through doesn’t eventuate there is room to fall.

“Both the physical drivers of the rally (central bank and physical demand) and rate cuts are largely priced in, and while they will continue to play a role in gold’s elevated price (more so rate cuts), the difference now is investor follow-through,” they said.

“ETP inflows have begun in earnest. We think the lingering interest will drive the next leg. Yet our base case is much closer to the high scenario ($2,466/oz in 2024 and $3,014/oz in 2025) than our low scenario ($2,286/oz in 2024 and $2,256/oz in 2025).”

“Our one significant remaining note of caution is that we think that if the gold-positive narrative melts away, there is room to fall (emphasis from RBC).

“Versus our high scenario where there’s limited incremental things that could go in gold’s favour, there are more – albeit less likely – gold-negative things that could happen in our low scenario.”

It’s a big shift from RBC. In April it previously bet a middle scenario for 2025 gold of US$2160/oz, with the new tip 31% higher in just five months. In fact, its old high scenario trailed the current gold price at just US$2394/oz.

Gold prices since 2001, and where they could be in 2025. Pic: RBC

Hedgers and low graders

But it’s important to remember that higher gold prices doesn’t necessarily mean better returns for miners.

Equities have a range of complexities to deal with. Notably, debt finance can come with locked in hedges, which means realisation against the gold price tumbles in a higher price environment, which also tends to bake in higher operating costs.

“Any company that has hedged over the last year is almost certainly showing a book loss. Why gold producers hedge at all is a mystery to those investors who want leverage to the gold price, but there are two obvious reasons,” Far East Capital’s Warwick Grigor noted this week.

“The need for debt finance to develop a project invariably comes with a hedge book at the insistence of the bank, but that can turn ugly if the gold price keeps going up. Ask Calidus.

“A more sophisticated hedge book comprising put and call options can be a better alternative to straight forward sales, but the options come at a cost. Another reason to hedge is where a project is a high cost producer that needs to lock in a minimum price level.”

Exchange rates from the US to Aussie dollar are an important consideration as well, especially if the US economy begins to falter.

Also, companies with lower quality or shorter life deposits may use higher gold prices to process lower grade material to boost mine life.

That can hit earnings today, but gives breathing space to explore for additional feed.

“Call it “low-grading” if you will. The incentive to do this is the ability to increase the mine life. Many gold projects have short mine lives,” Grigor said.

“The longer the budgeted mine life, the more time that is available for the geologists to identify and drill out additional resources.

“So, if a company reduces its cut-off grade, resulting in a lower head grade to the mill, earnings growth will lag behind the gold price trend. Investors may think that a rising gold price is good for all producers but that is a simplification.”

Grigor attributed some of the weakness in Bellevue’s recent share price, prompted by a discounted capital raising that saw the ASX 200 miner significantly trim its debt liability to Macquarie, in part to the impact of hedges.

“While a rising gold price should be considered good for gold producers, those with out-of-the-money forwards will not be treated kindly by the market. Check your gold company investments to see what theirs (sic) positions are,” he said.

Bellevue announced the establishment of a decline to access the Tribune Lode at the Bellevue Gold Mine in WA’s Northern Goldfields today. That will provide a second access route into the mine as BGL looks to ramp up production from 165,000-180,000oz this financial year to 250,000ozpa by FY28.

The broader materials sector saw off a weak morning session and iron ore price drop to finish 0.05% ahead.

Lynas (ASX:LYC) and Yancoal Australia (ASX:YAL), the latter of which was finally included in the ASX 200 and 300 after a sell-off by Chinese owners improved it’s liquidity, were among the biggest winners.

The gold sub-index, by contrast, was down 1.82% by the close of play on Monday.