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Gold price expected to keep soaring, with some miners still undervalued
Gold prices have skyrocketed back over US$2,000, posting their biggest weekly advance earlier this month since a mid-March rally as renewed worries about the US banking sector fuelled bets the US Federal Reserve will cut interest rates sooner than expected.
The precious metal finished the first week of May 1.3 per cent higher, while oil prices headed for a third consecutive weekly drop, the longest losing streak this year, as fears of global recession mount. After a turbulent 2022, gold first rose above the $2,000 mark in March on safe-haven demand, triggered by the banking crisis in the US and Europe after the rescue of Credit Suisse.
The precious metal has risen around 11 per cent year to date, compared with a rise of around 8 per cent for the US benchmark S&P500 and 4.6 per cent for the S&P/ASX 200. Many experts expect the bullish momentum for the safe-haven asset to continue amid sinking investor appetite for risk.
“Against the backdrop of turmoil in the banking sector, ongoing geopolitical tensions and a challenging economic environment, gold’s role as a safe-haven asset has come to the fore,” says Louise Street, senior markets analyst at the World Gold Council.
“As some economies teeter on the brink of recession, gold’s role as a long-term, strategic asset could take centre stage as it has a history of delivering positive returns in the last five out of seven recessions. Central bank buying is likely to remain strong and will be a cornerstone of demand throughout 2023 – even if at lower levels than the record highs seen last year.”
With the looming threat of developed market recession, Street expects greater inflows into gold ETFs later in the year.
Analysts revise forecasts
Goldman Sachs recently raised its forecast for gold, describing it as the best hedge against financial risks as the US banking crisis evolves. Goldman Sachs raised its 12-month gold price target to US$2,050 an ounce from US$1,950, joining many other experts upgrading gold price forecasts.
“We believe the market will be well supported not only by exchange-traded fund inflows once Fed fund rates have peaked but by a stronger ‘wealth’ effect,” the US bank says in a research note.
ANZ Research has also recently raised its gold forecast, citing a pause in the Fed’s interest rate hiking cycle and a weaker US dollar as grounds for the upgrade. ANZ expects the precious metal to trade at $2,000 at the end of 2023, accelerating to $2,075 by September 2024.
Gold is denominated in US dollars, which means any fall in the US dollar supports the price of gold as it becomes less expensive to buy, and hence more attractive for investors. Conversely, when the US dollar rises, that suppresses gold demand.
Despite the higher gold price, many gold miners listed on the Australian Securities Exchange are considered undervalued. As an example, Morningstar has a fair value on Australia’s largest gold miner, Newcrest Mining, of $33, below its $29.60 market price. Newmont recently improved its takeover offer to Newcrest shareholders with more equity and a fully franked dividend if the deal goes ahead.
“In line with Newmont’s higher indicative offer for Newcrest, we raise our fair-value estimate for the latter by 3 per cent to $33,” analyst Jon Mills says. Morningstar also rates another of Australia’s largest gold producers, Northern Star Resources, as undervalued, with a fair value of $15.85, compared with its market price of around $14.
Adding to demand for gold is the very high level of buying by central banks, the most conservative investors of all. Central banks boosted demand for gold by 228 tonnes during the first quarter of 2023, though that was down from 379 tonnes from the fourth quarter of 2022. Net purchases of gold by central banks in 2022 totalled 1,136 tonnes, an increase of 152 per cent on 2021, the highest level in 55 years.
