Gold prices are bottoming out as miners go through the painful restructuring needed to jump-start commodity prices, say analysts.
While gold has been trading between $1,270 and $1,420 this quarter, the commodity is set to recover, says Kevin MacLean, Sentry investments senior vice-president and senior portfolio manager. He and Sentry portfolio manager John Case spoke at an event in Toronto earlier this week.
MacLean says he has a technical price objective for gold of $2,000 per ounce by 2015.
“The trend is going from flat or down to flat or up again,” he says. He says the technical indicators for gold are strengthening, and he is seeing general investors return to the commodity. He adds large fund investors are placing bigger orders.
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And Chinese buyers are taking advantage of the low price for gold. They’ve bought US$70 billion so far this year, and show no signs of slowing down, says MacLean. A conservative estimate of Chinese gold consumption is 1,600 tonnes a year.
“At that rate, China’s demand is in excess of 55% of all the gold being produced in the world,” he says.
China has also said it wants the yuan to rival the U.S. dollar as a reserve currency, and plans to back 15% of its central bank holdings in gold (up from 1% now), says MacLean. That would mean accumulating nearly 16,800 tonnes.
“If they were taking all the gold being imported into China this year, it would still take them 10 years. This is a phenomenon that is going to keep supporting the gold price for a long time to come, and eventually undermine the dollar,” he adds.
India used to import 800 tonnes of gold a year. The government imposed a 10% import tax on the commodity this year to support its faltering currency. Now imports are nearly zero, says MacLean. “It can’t get any worse; only better,” he notes.
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Central banks in European and the U.S. have already sold much of their gold, he adds. If they decide to sell the rest, that “could beat on the gold market for a while,” he acknowledges. “This is a generational liquidation event, so it’s probably a generational buy opportunity.”
The Federal Reserve’s quantitative easing program is also hurting gold prices by shoring up the rest of the market, but the central bank is now expected to start tapering in March.
“With the Dow making new highs, that’s an easy, comfortable place for people to make money. Why mess around with gold?” he says.
But QE is also devaluing the U.S. dollar, something the price of gold will eventually compensate for. “If you double the rate of money, the gold price should double over time,” he explains.
The mining industry
The mining industry is compensating for lower gold prices, says Case. With gold at $1,330, many miners are currently overspending, he explains. But companies are becoming more efficient by slowing production and closing costly operations. This is tightening up supply and will raise the price.
“You get the double-whammy effect of dropping input costs along with higher grades and lower-cost ounces, and you’re going to see margins expand,” he says.
Junior mining companies like Alamos Gold and Primero Mining Corp. have lower costs and healthier balance sheets than larger companies like Barrick Gold, Goldcorp and Newmont, he says. But Barrick has been improving its costs and large gold miners still attract premium valuations compared to smaller producers.
Silver Wheaton, in comparison to gold juniors, has good cash flow, says Case.
While things are looking up for gold, says MacLean, there is still a chance its value could drop again before it recovers.
“There’s still an outside chance of gold getting below $1,180, although I think if we get through this year without having done so, I can’t see why we would,” he says.
If that happens, he suggests investors should swoop in and buy.
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