Monsters of Rock: RBC ups gold forecasts as prices climb, but warns of downside

RBC Capital Markets has upped its 2023 gold forecast, but sees downside to current prices
Analyst Alex Barkley says gold remains an important strategic investment allocation against market risks like the war in Ukraine
NST, BGL, RRL and SBM remain “outperforms” for the investment bank

Market watchers have been strong in their enthusiasm for gold prices in 2023, after bullion proved resilient against the threat of interest rate rises last year.

But there remain some holdouts with a bearish take on the safe haven metal, grinding against price predictions which range from the hopeful to the downright fantastical.

Investment bank RBC has taken a more stony-faced view on the commodity, upping its price forecasts by 1% to US$1735/oz for 2023 (US$1780/oz for Q1), before a fall to US$1700/oz in the fourth quarter, a price it expects to hold in 2024.

With prices in excess of US$1870/oz today, RBC’s Alex Barkley says there is a risk they have already run too far.

“We update our gold price forecasts to US$1,735/oz in 2023, with US$1,700/oz in Q4. We view a brighter macro backdrop ahead for gold, although prices have been resilient in the face of significant prior headwinds, and future upside may have already been front-run (spot US$1,860/oz),” he said in a note.

“Forecast changes increase our Australian coverage FY23 EPS by typically 5-10% and reduce FY24 EPS by around 5-10%. Our ASX stock recommendations remain unchanged. We continue to prefer NST, RRL, BGL and SBM, and expect underperformance from EVN.”

Barkley says correlations between real rates and the US dollar broke down in 2022, suggesting gold should be lower than its current spot rate.

“Market expectations have likely begun to discount Fed rate cuts in mid-2023. RBC economists also forecast rate cuts with two 25bps cuts in 2H 2023 from a terminal 5-5.25% (note),” he said.

“In our view, these cuts are not yet a foregone conclusion and gold has already begun to heavily discount this future potential upside. We see gold risks as skewing to the downside vs spot.”

Upside factors

It is not all doom and gloom. Well, it maybe, but that can be good for gold, the little devil that it is.

RBC expects gold to average US$1710/oz in the second half against a more bullish consensus of US$1800/oz, but Barkley says rising recession risks could be an upside factor.

“We view slowing growth over the course of 2023 as supporting lower future inflation and enabling restrictive policy to soften, thereby pressuring real rate expectations lower,” he said.

“Potential upside factors we acknowledge that could provide support for recent price strength include rising recession risks that have historically been gold-positive, a reversal of US dollar strength continuing, and low speculative gold investment positioning which has historically acted as a positive contra-signal.”

RBC continues to see bullion as a strategic allocation for investments against market risks like the Russia-Ukraine War, US-China tensions, trade tensions, resource nationalism and de-globalisation.

“With crypto currencies in the doldrums, we think gold stands alone as a non-debasable asset of last resort, one with high liquidity, negative correlations during shocks and positive correlations with equities over the long run,” Barkley said.

RBC sees long term prices at US$1600/oz from 2027, but there’s plenty of water to go under the bridge until then.

RBC gold picks share prices today:

And to the markets today …

Graphite miner Syrah Resources (ASX:SYR) climbed 3.96% but overall the mining sector took a hit today, with materials stocks falling 0.55% against a 0.28% drop across the ASX 200.

Gold miners gave up many of Monday’s gains, with the All Ords gold sub-index down 2.48% from yesterday’s eight month high despite strong prices.