Q3/23 Preview: Fed's "Higher for Longer" Stance Weighs on Gold
Safe-haven Demand and Short Covering Driving Current Rally
TD Investment Conclusion
Hawkish signalling weighed on gold price in Q3/23. Gold price ended the quarter at ~$1,850/oz (~$1,910/oz at the end of Q2/23), dipping below the $1,900/oz mark in mid-August and again in late September on surging yields and a more hawkish "higher for longer" stance by the Fed.
Conflict in the Middle East drives safe-haven demand. Gold has seen a resurgence in October due to the conflict between Israel and Hamas and concerns of escalation to other countries in the region, combined with a short covering rally (gold ~$1,975/oz yesterday). For Q3/23, the gold price averaged $1,927/oz ($1,978/ oz in Q2/23).
We remain positive on the gold price as rate reduction comes into play in mid-2024. The U.S. Fed rate cycle has historically been a significant factor driving gold price. Over the past 40 years, gold has increased an average of 34% during an easing cycle following the last rate hike of a tightening cycle vs. an average of 6% during periods of tightening. We expect the end of the hiking cycle and the beginning of easing cycle to be supportive to gold price. As such, our 2024 gold price forecast remains unchanged at $2,000/oz. We have lowered our 2023 gold price forecast to $1,931/oz (from $1,955/oz), with a Q4/23 average of $1,925/oz to account for the recent weakness in the gold price and our view that the gold price could check back in Q4/23 after the recent safe-haven rally. Our long-term forecast remains unchanged at $1,700/oz (Exhibit 1).
Company messaging appears to be that inflationary cost pressure has peaked, but not expected to ease. Most producers expect to achieve their 2023 guidance ranges (lower-to-mid range expected) and several have pre-released preliminary operating results (Exhibit 6). B2 Gold has seen YTD cash costs below its guidance range; the company may lower cost guidance this quarter. However, among the larger producers, we expect that Barrick and Newmont will be at the lower end of their 2023 production guidance ranges due to (1) a slower ramp-up at Pueblo Viejo for both companies and (2) the now-resolved strike at Newmont's Penasquito mine in Mexico that extended through Q3/23. We are forecasting average Q3/23 cash costs of $976/oz ($957/oz in Q2/23).
Our recommendations are unchanged. We have adjusted some of our target prices to reflect recent operational updates. We will reassess our target prices and recommendations with Q3/23 reporting. Our ACTION LIST BUY pick remains B2Gold. Our top picks are Agnico-Eagle among the large caps and K92 among the small caps. For silvers, our top pick is Pan American, and we continue to prefer Franco-Nevada among the royalty names.