Gold price to continue its upward trajectory and average $ 2,100/oz in 2021 (peaking at $2,200/oz in Q3/21), down from our previous estimate of $2,500/oz, but still a record average. Credit Suisse says if the US TIPS yield falls to -2.5%, gold could move to $2,500/oz. The main supporting factor continues to be unprecedented and very accommodative monetary and expansionary fiscal policy globally and in particular in the US, in response to the economic fallout from COVID-19. 

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Gold Price: You Should Focus on This To Gain More

Investors should focus on US real rates to determine gold price trajectory as this is the strongest historical correlation, and it incorporates interest rates and inflation. 

Credit Suisse thinks any near-term pullback in gold prices due to COVID-19 vaccine approvals and rollout is a good entry point because the economy remains fragile and the post-pandemic recovery will be gradual at best, meaning a low rate environment and an elevated gold price environment are here to stay at least for the next few years. 

Credit Suisse highlights quicker than expected US economic recovery, a more hawkish Fed (resulting from a quicker recovery), and lingering weakness in retail demand for gold (particularly in India/China).

Rational capital allocation:

In a historically high gold price environment, so far Credit Suisse have seen capital discipline from the senior and intermediate gold producers, with a focus on returning more capital to shareholders, mostly via higher dividends. This has been a conscious effort on the part of management teams to avoid the capital allocation mistakes that characterized the last gold bull cycle, specifically high premium M&A and/or capex-intensive growth projects that assume high gold prices. Notably, every senior gold producer in our coverage raised dividends in the past year on strong FCF at prevailing gold prices. Average 2021 FCF yield for the senior gold producers is 8% and 16% for the intermediates (though this can move around depending on new project approvals and capex).

Capital discipline will be the differentiator:

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Credit Suisse thinks that the key differentiator for gold companies in 2021 will be capital allocation discipline. To the extent that gold miners continue to generate significant FCF and return capital to shareholders, we should see valuation multiples expand (currently trending below 10-year average). However, if companies begin to use higher reserve prices (currently $1,200-1,300/oz), complete acquisitions at >10% premiums, and approve capex-intensive, greenfield projects, then expect multiples to contract. There is an inherent need for miners to spend on exploration and development to replace reserves, but investors in this environment prefer low-capital, brownfield projects to maximize cash flow while increasing reserve life.