Gold is back in favour and producers are ready to take advantage of this, which is informing global equity, foreign exchange and precious metals broker dealer Velocity Trade Capital’s bullish outlook for the sector.
The company’s bull case projects gold climbing back to $2 000/oz by the end of this year and a sustainable rise to $2 500/oz by 2025, with peaks of $3 000/oz possible.
The gold sector is no longer one in crisis, the company posits, with gold producers now well poised to capitalise on higher prices with strong balance sheets, stable lower cost production and free cash flow/dividend growth.
It notes that ongoing consolidation has helped make the sector investible.
The company predicts that gold prices will have sustainable, long-term upside, and expects sector multiples to re-rate towards historical levels.
While Velocity expects juniors, developers and explorers to attract increasing investment dollars over time, presently, it sees further near-term upside in the larger, more liquid ends of the market.
Therefore, it notes that it is “still early in the rally”, and advises that focus should be on liquid, diversified cash generators.
Driven by its bullish long-term gold forecast, Velocity sees upside to its targets for every stock under coverage (average of 65%).
Despite the premium valuation, Velocity sees more multiple expansion for both market leaders Barrick Gold and Newmont, noting that the giants of the sector are the first stop for new capital into the sector, and increasingly compete with royalty companies, rather than other producers for capital.
The company’s top global picks are AngloGold Ashanti, Newcrest and Yamana, with it indicating that all offer a combination of low risk growth and attractive valuations in diversified portfolios.
Velocity mentions that volatility could continue in the near term, owing to the still unknown course of the Covid-19 pandemic, the impact on mining operations and, most importantly, the global economy.
Despite this, it is looking largely past the potential for near-term disruption, with strong conviction in long-term rising gold prices, and the renewed ability for producers to benefit, and sustainably grow production and capital returns.
Velocity says investors should be adding to positions in sector leaders, and increasingly looking for value, leverage and alpha downcap, including among junior producers, developers, and explorers ahead of further consolidation and the need to build more mines.
Velocity says the fiscal and monetary response to the economic effects of the ongoing pandemic should result in a higher re-rate of gold.
It notes that gold’s key price drivers are best aligned since 2009, with macro-factors across the board indicating both short- and longer-term strength.