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Gold tipped to break record as volatility, low rates bite

Nicki Bourlioufas  |  29 Aug 2019Text size  Decrease  Increase  |  
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Gold has posted major price gains in recent weeks as investors seek a safe haven from tumbling interest rates and equity market volatility.

With the metal shooting above US$1500 an ounce in August, some analysts say the precious metal could challenge its previous record of nearly US$1920 an ounce.

In Australian dollar terms, gold has already set a record, boosting local miners to multi-year or record highs on the Australian Securities Exchange. Experts see more gains for gold and its miners, given a global economic slowing.

Gold has struck its highest level in August after the US Federal Reserve Board cut interest rates. More cuts are expected by the year’s end to offset global recession.

Shane Langham, a senior private wealth adviser with Phillip Capital and author of the Charting Wisdom share market report, says a key resistance level for gold is about US$1800 but if it breaks that, it could test its previous all-time high of US$1920 set in 2011.

“Back in 2011 to 2012 there were three tops averaging US$1796.00 just shy of the big round number US$1800.00 level.

“These are the main potential resistance levels to watch for retracements or where gold pauses and moves sideways before it will be in a position to attack the US$1920.18 all-time high formed back in September 2011,” says Langham.

For Australian investors, gold has already broken above the September 2011 all-time high of $1866.58, benefitting shareholders of gold mining stocks.

“Aussie dollar gold has been trading as high as $2252.74, some 20.7 per cent higher than the previous all-time high. Aussie investors have had the benefit of a double whammy with the gold price rising and the Australian dollar falling, making gold a very attractive investment for Aussies,” says Langham.

“After all we use Australian dollars to buy gold not US dollars. I still have an upside target of $2447.43 on Aussie gold that we are working towards. This is a very compelling reason for the local Aussie gold miners to continue to do well moving forward,” he says.

Sam Berridge, portfolio manager and Resource analyst at Perennial Value Management, says as long as the theme of lower interest rates and weakening macro-economic data continues, gold will rally. 

“As long as this [US-China] dispute continues, I’m sceptical as to whether lower rates by themselves can halt the negative momentum in demand. Should we see a sharp resolution to the trade dispute, I would expect gold to sell off, but that seems unlikely at the moment,” says Berridge. 

“In terms of stocks, I think it’s fair to say the majority of the large and mid-cap golds are factoring in prices well in excess of the current gold price. In our view St Barbara is offering better value than its peers, being that its acquisition of Atlantic is looking less expensive as the gold price moves higher,” says Berridge. 

“More broadly though, better value will be found in the smaller gold producers and developers. We’d highlight Ora Banda Mining as having a large, moderate-to-high grade resource base and a mill which can be restarted in six months for roughly $8 million as looking cheap. 

“Also, while it’s had a good run, Red 5 has added materially to its resource base over the last 12 months and there’s more to come here. So, while the share price has rallied, a lot of that increase in market cap has been backfilled with gold discovery, not just gold price.”

According to a research note from Morgans, many gold stocks are trading at elevated levels, including Newcrest Mining (ASX: NCM), Evolution Mining (ASX: EVN) and Northern Star Resource (ASX: NST).

Morgans’ pick of the gold miners is Ramelius Resources (ASX: RMS). “As the larger producers become fully valued, investors begin to look at smaller producers that may be getting less attention such as emerging mid-tier producers like Ramelius,” said analyst Dorab Postmaster.

Morgans likes the stock given its increasing reserve life, growth profile and growing appeal as a takeover target. It also has balance sheet strength with more than $100 million of cash and zero debt.

Views are mixed on how far the gold price will climb. Citi Research is the one of the most optimistic, recently boosting its six-month to 12-month COMEX gold target price to US$1600 an ounce. 

“For now, it seems the yellow metal is poised to outperform from both the fundamental and momentum driven channels,” says Citi.

A research note from UBS forecasts gold will reach US$1600 this year, though the risks are skewed to the upside. It names Evolution Mining, Alacer Gold, Polymetals Mining and Hochschild Mining as preferred gold stocks. 

CBA commodities analyst Vivek Dhar doesn’t think US$2000 is likely to be breached, having previously forecast a peak of US$1500 by the first quarter of 2020.

“Global growth risks have intensified and long-term US real yields (the main driver of gold prices) have declined further since [July]," Dhar says.

We see upside risks to our gold price forecast, but gold prices at US$2000/oz implies significantly more downside to the global economy. We don’t think that will materialise based on current economic indicators."

 

is a Morningstar contributor.

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