LAWRIE WILLIAMS: BoAML looks for higher gold price and silver prices but….
Bank analysts are beginning to buck the trend. The analysts usually play for safety so tend to be reactive to moves in the gold price, rather than proactive in going out on a limb and forecasting higher prices when their peers are mostly pessimistic. Thus earlier this year most bank analysts out there were forecasting lower gold prices ahead. But, of course, the gold price has performed rather differently with a rise of around 20% from its lows late last year and the longer this has been going on the more willing some analysts have been to change their views, but still basically remain conservative overall.
Bank of America Merrill Lynch Metals Strategist, Michael Widmer, is one who was bucking the trend with a more positive view of the gold price looking forward back at the end of March. He was one of the earliest of the bank forecasters to take a more bullish (in bank analyst terms) view of the gold and silver sectors
Now in their latest detailed 96-page assessment of the precious metals sector and stocks, BOaML analysts, Michael Jalonen and Lawson Winder, also take aup this positive view on the gold price coming up with a forecast of an average gold price for the year of $1,232 an ounce suggesting some sharply higher prices in the second half of the year to achieve this given the Q1 average was $1,184 an ounce and the current price as I write is $1,273. In the light of this prediction, though their forecast for 2017 might still look fairly conservative at $1,293.
The gold price average year to date is just a little north of $1,210, so gold will have to spend much of the second half of the year at levels of around $1,300 or higher to achieve the kind of yearly average the analysts are predicting. Some may not consider this a particularly bullish forecast, but for bank analysts, given their generally hugely conservative viewpoints that may be as strong as it gets unless, and until, gold is seen as strongly breaking out of its current trading range of around $1,210 - $1,280. Given all the geo-economic and geo-political uncertainties that would seem to lie ahead – starting with a possible Brexit vote in less than 2 weeks’ time, and the potential effects of a UK leave vote, were it to happen, on the EU as a whole and the global economy in general - these kinds of levels certainly wouldn’t seem to lie outside the bounds of possibility, or indeed probability.
So what are the key points being made to justify their assessment? Having been in a prolonged bear market, they state that they believe gold is in the process of bottoming out, with USD, rates, volatility and oil becoming more supportive. They see a less hawkish Fed letting inflation rise or potentially overshoot the 2% mark, thus keeping real rates low, and feel that this is also removing one key headwind for gold.
They note that gold ETF buying is also running at record levels. Gold holdings of global gold ETFs have risen 24.7%, or 361 tonnes, to 1,822 tonnes in 2016 year to date. By their estimates, this has added 29% to normal monthly global gold demand so far this year. To put this increase in perspective, the pace of buying in 2016 year to date is equal to over 985 tonnes of gold on annualized basis. This would be a record annual total.
Back in April, Michael Widmer also increased his near and long-term silver price forecasts. His more constructive view rested on both the supply and demand side which suggested to him that the rebalancing is unfolding, removing the glut that that had been so bearish for prices in recent years.
The BoAML Commodities Research team in their latest report concur to an extent, seeing silver averaging $16.47 an ounce in 2016, 4.8% higher year on year; and $18.41 an ounce in 2017, 11.8% higher year on year and a good increase on the current price of around $17.30. Their long-term (real) silver price, however is a rather more conservative at $17 an ounce. Despite this they also note that The gold:silver ratio is currently at just below 74, well below the recent high of 83 but still well-above the historical median of 56 , indicating that silver is still oversold versus gold, although they caution that the current ratio is still well off the all-time peak of 99.7 reached on February 27, 1991.
So the report is a little curate’s eggy – good in parts – but still with a very cautious underlying tone. Much depends on whether the current ETF gold inflows continue (which itself is probably a function of geopolitical uncertainties, which could remain right up until the U.S. Presidential election in November.) Also Asian demand has been weak so far this year – will it pick up in the second half, which may depend on a good monsoon season in India and at least a stabilisation in the Chinese economy?
The 96 page report goes into some considerable detail on the state of the gold and silver markets, and also gives BoAML recommendations on gold and silver stocks. (Positive on Goldcorp, Agnico Eagle, Tahoe Resources and Kinross, royalty/streaming companies Silver Wheaton, Franco Nevada and Royal Gold, junior miner Semafo etc. Indeed something for everyone.
We do commend the more positive view on gold and silver for the current year but note that it is perhaps less so long term. Bank analysts’ conservative tendencies are deep-rooted. It does seem strange however that they are predicting a stronger gold price in 2017 (albeit only marginally so), but are much more negative on silver beyond that despite the latter’s tendency to outperform gold on the up. While not specifically saying so this suggests they are more cautious on gold long term than the report introduction would suggest.