Gold producers have been among the biggest winners during the pandemic, as investors bet that ultralow interest rates, massive government debt loads and an uncertain global economic recovery will keep the price of gold buoyant.
Missed the rally? Some observers expect that precious metals producers will continue to perform well in the year ahead.
Analysts at CIBC World Markets raised their target prices – or where they expect share prices will be in 12 months – on 36 gold and silver stocks this week, based on their bullish outlook for gold and silver prices over the next few years.
“Although it has been a strong year already, the bull run appears far from over,” CIBC analysts said in a note.
Gold has delivered a year-to-date gain of 24 per cent, which places the asset – traditionally a haven when the stock market is turbulent – just a percentage point behind roaring information technology stocks and smashing everything from the S&P 500 to the Russell 1000 Growth Index to the 10-year U.S. Treasury bond, according to a recent report from Goldman Sachs.
A number of observers expect that the dazzling run isn’t over.
Goldman Sachs expects the price of gold will rise to US$2,300 an ounce within the next three months, and stay there for the next 12 months. The forecast implies gains of nearly 17 per cent from Wednesday’s most-traded futures price of US$1,970.50. Gold briefly hit a record high of US$2,089.20 in early August.
Bank of America is similarly bullish. Technical analyst Paul Ciana initially thought that the price of gold would decline toward US$1,800 an ounce, weighed down by stretched momentum and trend indicators. But Mr. Ciana said in a note that gold’s sideways drift over the past six weeks means that the swift rise earlier this year is no longer a cause for concern. As a result, he recommends buying on any dips.
The CIBC analysts have taken a more fundamental approach that is based largely on the current macro-economic environment.
“The set-up for precious metals and the precious metals sector is strong with trade wars, low rates and the [U.S. Federal Reserve] allowing for wiggle room on its long-run target for inflation,” the analysts said in their note.
They expect gold will rise to US$2,300 an ounce in 2021, which lines up with Goldman Sachs’s forecast. And they expect the price of silver will rise to US$32 an ounce in 2021, implying a gain of more than 16 per cent.
But equities can provide investors with additional upside: Gains in the price of gold or silver can deliver bigger gains in corporate profits and cash if a company’s fixed costs remain relatively stable. The CIBC analysts note that the S&P/TSX Global Gold Index has risen 46 per cent this year, bolstering the view that gold stocks can deliver about twice the gains of actual gold.
The simplest bet: Buy an exchange-traded fund, such as the iShares S&P/TSX Global Gold Index ETF (XGD), which provides broad exposure to the sector.
CIBC, however, has carved out its top picks in the sector, based on the quality of assets and the prospect of strong free cash flow. Among large producers, they like Barrick Gold Corp., Agnico Eagle Mines Ltd., Kirkland Lake Gold Inc. and B2Gold Corp.
Among intermediate producers, they like Pan American Silver Corp., Endeavour Mining Corp. and Alamos Gold Inc. Among small-cap stocks, they prefer Teranga Gold Corp. and Osisko Mining Inc. And among gold royalty companies, they pick Franco-Nevada Corp. and Wheaton Precious Metals Corp.
“While all of these equities posted significant share price gains, on average 50 per cent year-to-date, we believe there is still substantial room to move higher on the back of company-specific catalysts, improving free cash flow yields and an increased focus on return of capital to shareholders, which in turn will attract renewed interest to the space,” the CIBC analysts said.
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