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Macro Intelligence: central banks' gold rush and the new era of investment

Despite a significant underperformance in Australia-listed gold stocks in comparison to the price over the past three years, UBS for one, says “in this price environment there are very few bad gold stocks to hold.”

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Article written by Nadine Blayney (ausbiz)

Gold's rising appeal in troubled times

The record run for gold is being driven by rising geopolitical tensions, which are reigniting the precious metal's safe-haven appeal. That risk aversion is overshadowing pressures from the expectation for higher-for-longer US interest rates as higher interest rates can reduce the appeal of holding non-yielding gold.

Spot gold weekly chart

Source: IG

The safe-haven price driver is coming against a backdrop of strong central bank purchases of gold. China is a big buyer of physical gold as it shifts its reserves away from US dollars. Other countries continue to buy physical gold to ramp up gold reserves including India, Turkey, and Poland, according to Goldman Sachs.

Central bank gold buying trends by nation

Source: Goldman Sachs

Gold stands strong despite ETF outflows

The gold price is also holding up in the face of continued outflows from gold ETFs, which continued in March for the tenth consecutive month, albeit at a slower pace. Physically-backed gold ETFs are an important source of gold demand, with institutional and individual investors using them as part of well-diversified investment strategies.

Regional breakdown of gold ETF holdings and flows

Source: World Gold Council

Goldman Sachs versus Citi's bullion outlook

Goldman Sachs recently hiked its year-end gold price forecast to $2,700 per ounce from $2,300, saying the metal's bull market is not being driven by the usual macro factors. "With Fed cuts still a likely catalyst to soften the ETF headwind later in the year, and right tail risk from the US election cycle and fiscal setting, gold's bullish skew remains clear," Goldman analysts said in a note.

Meantime, Citi recently lifted its 6-12 month topside levels towards its "bull-case scenario" to $3,000/oz. It says rather than a demand for duration or a weakening US dollar driving the record run for gold, a potent combination of alternative-fiat demand, geopolitical hedges, macro-overlays on equity and credit portfolios, and financial buying catching up to robust physical demand are "working in sync" to push bullion higher.

A glimmer of profit in Australian mines

Of course, investors and traders need companies which can 'make hay while the sun shines' when it comes to the gold price. In terms of Australian production, UBS said in a recent note with spot gold already running ahead of its "bullish" forecast of $2,300/oz by the end of the calendar year, if the gold price holds at current levels it sees a 20% upside to its net present values (NPVs) at US$2,000/oz.

UBS analysts say while WA rainfall is the latest production challenge. And even in the face of the recent re-investment cycle and poor production performance pressing free cash flow and margins, gold stock's underperformance could be a "distant memory" if the spot price holds.

The appeal of Evolution Mining’s diverse portfolio

Evolution Mining's (EVN) production report came in line with expectations for the March quarter, with its all-in-sustaining-cost (AISC) at $1,464/oz. Guidance was unchanged targeting the low end of gold production and costs. UBS says it requires a very strong June quarter for gold production at higher grades across its Cowal, Mungari, and Red Lake projects. It has a 'buy' rating on the stock with a $4.35 price target, saying the company "looks good into FY25."

Evolution is a top preference for Morgan Stanley while Todd Warren from Tribeca told ausbiz they also like the stock due to its exposure to not only gold but also copper.

Evolution Mining monthly chart

Source: IG

Northern Star's resilient production continues

Northern Star (NST) says it remains on track to deliver its FY24 guidance of 1,600 to 1,750-K ounces of gold sold. The miner says its June quarter has started with strong operational momentum with weather disruptions now seemingly behind it. In the March quarter - Northern Star sold just 401,000 ounces of gold due to the impact of significant weather events across the Northern Goldfields.

Northern Star monthly chart

Source: IG

Despite significant underperformance in Australia-listed gold stocks compared to the price over the past three years, UBS, for one, says "in this price environment there are very few bad gold stocks to hold."

Gold Road Resources monthly chart

Source: IG

Junior giants: small to mid-cap gold stocks on the rise

Jefferies has lifted its price target on Gold Road Resources (GOR) to $2.20 from $2.15, stating it is its preferred pick among junior Aussie gold miners. While Collins Street Asset Management sees significant value in the small to mid-cap gold sector at the moment, liking Barton Gold (BGD) as cheap at current levels.

As for the bigger-name stocks, Newmont Mining (NEM), an American company, is the world’s largest gold mining corporation. The current recommendation for the stock according to analysts surveyed by Refinitiv is a BUY with a target price of $13.41, suggesting a 13% upside from current levels.

Five-day stock chart: price action and volume analysis

Source: Refinitiv

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