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Gold rally confuses analysts and fund managers

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Goldman Sachs agreed that the breakdown in gold’s correlations means a new framework is needed. It suggested gold as a barometer for “fear and wealth”.

The broker is far more bullish than RBC, which believes the market hasn’t fully recognised the metal’s vulnerabilities, and predicts prices will average $US2248 an ounce in 2024.

Oxford Economics thought it was already bullish on gold, but it too has seen its forecasts thumped. It warned that prices are now vulnerable to a short-term pullback, and subsequently closed its long position that it opened in October last year.

Oxford believes the rally has been supported by an increase in investment managers taking long positions, which have spiked over the last month to the highest since the pandemic broke out in 2020.

“We think that the rally has run out of steam among speculators who won’t continue buying gold at the same pace,” said economist Diego Cacciapuoti.

In contrast, Goldman last week upgraded its year-end price forecast to $US2700 an ounce, from $US2300 an ounce previously. It believes that US Federal Reserve rate cuts arriving later this year will likely stem the outflows being suffered by exchange-traded funds that buy physical gold.

Indeed, ETFs have shed around 900 tonnes of physical gold since holdings peaked in the fourth quarter of 2020, Citi noted. ETF providers buy and store gold to match demand for their securities.

But any outflows appear to have been absorbed by central banks, whose gold purchases hit their second-highest level in 2023, buying around 1037 tonnes collectively.

And Citi expects that trend to continue, projecting more than 1000 tonnes of central bank purchases this year, which would be the third-highest volume since the Nixon shock in 1971, the last time foreign governments could exchange their dollars for gold.

Citi this week upgraded its forecasts to its “bull case scenario”, triggering a 6.8 per cent increase to its 2024 projection to $US2350 an ounce, and an “admittedly massive” 40 per cent lift in 2025 to $US2875 an ounce.

Laggards

The broker believes that an eventual interest rate cutting cycle by the Federal Reserve and a rally in Treasuries could be the kicker to boost gold to $US3000 an ounce in the next 12 months.

But while analysts scramble to retool their forecasts, investors are also wondering when the surging gold price will flow through to the valuations of gold producers.

Indeed, the VanEck Gold Miners ETF has underperformed the gold price by around 30 per cent over the past three years. But UBS noted this week that the ETF has begun to close the gap.

The broker argued that if gold holds at current levels, it amounts to 20 per cent upside to 2024-25 earnings for gold miners under its coverage.

While UBS acknowledged that wet weather in Western Australia will keep pressure on FY24 guidance and costs, that wouldn’t be enough to take the shine off the surging gold price.

“While recent WA rainfall is the latest production challenge, making meeting the bottom end of guidance a beat, in this price environment there are few bad gold stocks to hold,” said UBS analyst Levi Spry.

Wilsons Advisory agreed that the sector’s leverage to the gold price will outweigh the impacts of cost inflation in the medium term – a dynamic which is not yet adequately reflected in consensus earnings.

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