Global Mining Strategy - Gold vs. Gold Equities – Fickle or Fundamental
With gold having potentially entered a new bull-run, we believe the underlying metal provides more
upside than the equities at this point. While gold is currently one of the top performing assets this year,
its 26% YTD gain pales in comparison to the +110% average lift across the senior producers. With gold
tracking changes to global real interest rates we will be watching factors that could affect real rates
including i) monetary policy, ii) yields, iii) oil prices, and iv) inflation prints. Weak physical demand
remains a concern and will be tracked along with scrap flows and producer hedging.
* Further allocations to gold could see additional gains
We think the gold market has entered a new bull-run, and we expect the next leg to be driven by a
continuation of strategic portfolio allocation into gold from a diverse set of investors. In our view, gold
remains under-owned and a prolonged period of depressed real yields and elevated macro uncertainty is
likely to see broader participation in the gold market. However, while maintaining a constructive view on
the underlying we think that the equities have already priced in our 2017 gold price upside scenario.
* What's priced into the equities ?
Across our coverage universe, the current share prices are implying an average gold price of $1489/oz
(5% discount rate), an 11% premium to the spot price and a 6.5% premium to our $1400/oz forecast
for 2017. At a 10% DR, the implied price jumps to $1656/oz, or a 23% premium. For the larger, more
liquid names, these implied prices are $1528/oz and $1757/oz respectively – premiums over spot of 14%
and 31%.
* What is the best way to play the gold thematic ?
At this juncture, we would prefer to be long gold underlying as opposed to the equities as we view this
as a cleaner expression of the macro view and reflective of the share price performances over the last 6-
months. However, despite this broadly negative view of gold equities, there does appear to be small
pockets of value. Objectively using equity analyst recommendations and implied gold prices, our
preferred equities are Acacia, Alacer, Barrick, Evolution and Perseus. Based on the same methodology,
our least preferred equities are Fresnillo, Hochschild, Newcrest, Randgold and Regis.