Sterne Agee analysts Michael S. Dudas and Satyadeep Jain believe that gold could get a lot of attention as a safe haven as the geopolitical crisis in Ukraine ramps up.
Growing tension between the West and Russia on Ukraine crisis, China’s first bond default and greater economic uncertainty have boosted safe haven demand for gold. Increasingly mixed economic data, visible continuity from the Federal Reserve Board regarding an elongated zero interest rate policy (ZIRP), a reversing trend in the value of the dollar and supportive internal physical demand and investor interest should aid price trends. We rate Agnico Eagle Mines Ltd (NYSE:AEM), Coeur Mining Inc (NYSE:CDE), Gold Resource Corporation (NYSEMKT:GORO) and Newmont Mining Corp (NYSE:NEM) as Buys.
Geo-political Concerns Boost Safe Haven Demand
Growing tension between the West and Russia on Ukraine crisis, and China’s first bond default have boosted safe haven demand for gold. We have argued that part of 2013’s painful price decline discounted the beginning of taper. However, the Fed balance sheet holdings are slated to exceed $4 trillion during 2014 once the Fed completes the taper.
Reversal in Investor Sentiment Positive
Global ETFs have finally witnessed net inflows in March’14 so far, after outflows almost continuously since Feb’13. Also, we have seen a strong reversal in speculative net long positions held by Comex gold futures and options hedge fund traders, with significant increase in net long positions for both gold and silver in the past few weeks.
Physical Demand
2014 started off strongly for China with healthy gold demand in the traditionally strong seasonal period resulting in gold premiums rising to $10-$20/oz. We are not overly surprised with recent Chinese physical demand weakness given current seasonally weak period. Chinese gold demand could exceed 2013’s record 1,200 tons, while the India government wrestles with its unpopular policy of maintaining import tariffs.
Gold Mining Shares up 30% year-to-date as evidenced by the Philadelphia Gold and Silver Index (XAU)
As mining managements continue to communicate with investors, cost and capital successes and goals show a more sustainable business model going forward; we believe the gross underperformance of 2012-13 can be reversed. We rate Agnico Eagle Mines Ltd (NYSE:AEM), Coeur Mining Inc (NYSE:CDE), Gold Resoruces and Newmont Mining Corp (NYSE:NEM) as Buys, with Barrick Gold Corporation (NYSE:ABX), Hecla Mining Company (NYSE:HL) and Pan American Silver Corp. (NASDAQ:PAAS) rated Neutral.
Risks to our Expectations include accelerating deflationary trends, stronger U.S. dollar, lower energy prices, faster than expected central bank withdrawal of liquidity, margin squeeze from cost pressures, disappointing reserve write-offs and investors continuing to accord a lower relative multiple to gold equities.
