Q3/20 Preview & Deck Change: Gold is the U.S. Election Winner
Post-U.S. Election Fiscal Deal to Drive Gold Price Higher 2021 Gold Price Forecast Increased to $2,100/oz
We expect that investment appetite for gold will continue to rise, particularly in the period that follows the U.S. election. In fact, we believe that the long gold trade is agnostic to the election outcome — and investors need not look too far on the horizon to expect a large-scale fiscal deal in the U.S. that could de-bottleneck the ongoing real-rate suppression. In fact, with both the Trump and Biden agendas estimated to cost between $5.0trn and $5.6trn over the next decade, both plans would provide substantial tailwinds for gold, barring a split-government outcome. We expect a weaker U.S. dollar and increasingly negative real rates into 2021 to remain the principal drivers behind the gold price.
According to the World Gold Council’s September report, global gold ETFs saw their 10th straight month of inflows last month. For the first time ever, such funds added more than 1,000 tonnes of gold so far this year, the equivalent of $55.7 billion. That being said, physical demand from China and India has been weak in 2020, putting more onus on ETF demand to support the market.
We have increased our gold price deck to reflect our expectation of a continued supportive environment for the next several years. Our 2021 gold price increases to $2,100/oz (from $1,850/oz, +13.5%) and our 2022 forecast has increased to $2,000/oz (from $1,900/oz, +5.2%). We have also increased our silver price deck, forecasting $27.50/oz for 2021 (previously $22.50/oz, +22%) and $25.00/oz for 2022 (previously $23.00/oz, +9%). Our long-term gold and silver prices are unchanged at $1,500/oz and $20.00/oz, respectively.
Gold price averaged $1,912/oz in Q3/20, the highest quarterly average on record; as a result, we expect that producers will demonstrate the strong FCF generation that the gold sector is capable of producing. We estimate combined FCF for the top 10 North American precious metal producers of $3.1bln, or 1.8% of their aggregate market capitalization. Investors are sharply focused on capital allocation and the return of capital to shareholders. Already this reporting season, several producers have increased their dividends and adjusted their dividend policies — we expect that this trend will continue into the Q4/20 reporting season.
We are maintaining our OVERWEIGHT sector recommendation. We continue to prefer high-quality, low-cost producers with the ability to generate free cash flow, and companies that are able to continue to grow or maintain their current production levels over the medium term. Our ACTION LIST BUY picks are Barrick Gold and B2Gold. With this report, we have upgraded Franco-Nevada, Royal Gold, and Sandstorm to BUY recommendations (from Hold). Recent share-price declines for all three companies, combined with our higher gold/silver price forecasts, have resulted in attractive returns to our revised target prices