In a report Monday, market analysts at CIBC raised their price target for gold, looking for the yellow metal to average $1,350 an ounce this year, up from their previous forecast of $1,300. The bank sees gold prices averaging $1,400 an ounce in 2020.
“Slowing growth combined with lowered rate-hike expectations, Brexit uncertainty, and constructive demand-supply fundamentals for gold drive our positive outlook for precious metals demand over the next two years,” the analysts.
The comments come as gold prices struggle to push above critical resistance at $1,300 an ounce. February gold futures last traded at $1,278.80 an ounce, down 0.30% on the day.
With its gold upgrade, the bank is maintaining its top recommendations within the mining sector.CIBC’s top picks are: Agnico Eagle (NYSE: AEM, TSX: AEM), Barrick Gold (NYSE: GOLD, TSX: ABX), Franco-Nevada (NYSE: FNV, TSX: FNV), Wheaton Precious Metals (NYSE: WPM, TSX: WPM) , Kirkland Lake Gold (NYSE: KL, TSX: KL), B2Gold (NYSE: BTG, TSX: BTO, SSR Mining (TSX: SSRM, and Equinox Gold (TSX.V: EQX).
“We believe that consistent delivery evidenced by upward guidance revisions in 2018, organic growth opportunities, and exploration potential combine nicely with an improving balance sheet and attractive relative valuation. We see further upside to the stock in the near to medium term,” the analysts said.
“The outlook for this sector has improved for the year ahead on the back of improving fundamentals for the commodity itself, strengthened balance sheets, and a greater focus on capital discipline and returns for shareholders,” they added.
Looking at the factors to drive gold prices, CIBC analysts said that falling real interest rates as the global economy slows will have a significant impact on prices this year. The analysts noted that because of the softer growth outlook, they expect the Federal Reserve to raise interest rates only once this year. However, they added that inflation will continue to creep higher, meaning real interest rates will remain low, a positive for gold prices, as it will keep the opportunity costs of holding a non-yielding asset low.
“We no longer see the Fed at risk of overshooting the neutral rate and view the 2020 cut as a signpost of a mid-cycle ease when fiscal policy tightens,” the analysts said. “Despite this, it is hard to see inflation falling much below 1.8%-2.3% in 2019 or 2020 as unemployment remains very low by historical standards – and let’s not forget the potential of additional tariffs and trade disruptions. Real rates are unlikely to move much higher.”
A low interest-rate environment will also mean that the momentum the U.S. dollar saw in 2018 will probably weaken this year.
Another factor the bank sees driving long-term gold prices if that supply is falling. The analysts said that they see peak production coming in 2021 as companies, over the last few years, have significantly cut back exploration budgets to improve their balance sheets.
“Over the past several years, we have seen the sector forced to refocus on shareholder returns leading to improved balance sheets, asset rationalization and improvements in return on invested capital,” the analysts said. “This fiscal discipline has also pushed out development pipelines and further reduced expected mine production over the next decade, thereby reducing the expected excess supply profile over the next several years.”
The SPDR Gold Shares (GLD) was trading at $121.19 per share on Tuesday morning, up $0.17 (+0.14%). Year-to-date, GLD has declined -1.99%, versus a -0.90% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Kitco.