SocGen's call on gold Societe Generale Contemplates $1150 Gold, Cuts AngloGold, Randgold
By Ben Levisohn (Barron's On-line)
Societe Generale’s mining analysts are at it again. After becoming bearish on gold back April, analysts Bruce Alway and Sergey Donskoy have cut their forecast for the precious metal once again. In a report today, its mining analysts lowered their gold price assumption to $1,400 an ounce from $1,500. They write:
We are downgrading our financial forecasts to reflect the latest developments in the gold market. In our valuation models we are therefore lowering our life-of-mine gold price assumption to $1,400 (was $1,500) and silver to $23 (was $27), bringing it broadly into line with the current spot price.
That $1,400 is still higher than the French investment bank’s commodity strategists forecast, however. The strategists expect gold to approach $1,200 by the fourth quarter of 2013, $1,150 in 2014 and $800 by 2018. Alway and Donskoy contemplate the effect on hold miners.
Using $1,150 in our equity valuations, we would see a further 55% average downside to stock prices, a result that would generate Sell ratings across our entire coverage. In this context we are running our valuations on a (close to) spot basis and focusing on relative valuations instead.
At $1,400, they cut their ratings on Randgold Resources (GOLD) and AngloGold Ashanti (AU). Alway and Donskoy write:
The changes we make to our ratings include: 1) downgrading AngloGold Ashanti to Sell from Hold (the high all-in sustaining costs and restructuring required in South Africa will be more difficult in a low gold price environment given unionised labour); 2) downgrading Randgold Resources to Hold from Buy (a quality name but on our lower gold price the multiples look stretched)…
As for that lowered gold forecast, here are Soc Gen’s commodity strategists explaining their decision:
The gold price had already reached our year-end target of $1,375/oz in April. We believe the dramatic sell-off in April will accelerate the likely continued exit of investors from ETF gold holdings. ETF gold selling has averaged 110 tonnes per month since the April sell-off. We expect ETF selling to continue and this is likely to exceed higher demand for jewellery/bars and coins. Therefore, we have revised lower our Q4 13 gold forecast to $1,200/oz. The gold price is, in our
view, in bubble territory. Investors have pushed the gold price sharply higher over the last 10 years with the last five years having been driven by fears that aggressive central bank QE would lead to very high inflation. But inflation has so far stayed low (US inflation has been trending lower since late 2011) and we are now beginning to see the economic conditions that would justify an end to the Fed’s QE, and we expect the US dollar to strengthen medium term.
The SPDR Gold Trust (GLD) has dropped 0.5% to $133.56 today, while the Market Vectors Gold Miners ETF (GDX) has fallen 0.4% to $28.23. AngloGold has dipped 0.4% to $16.31 today, while Randgold has dropped 0.3% to $75.14. Gold Fields (GFI) has fallen 0.5% to $5.91.