Gold price rallies tend to be short and sharp but Morningstar has forecast that, after rising strongly last year, the metal may hold its current level through the rest of this year.
The gold price rose around 29 per cent during the December quarter last year to US$1500 an ounce. It is currently around US$1570 an ounce.
Morningstar is optimistic that the latest price increase might be sustained because “with interest rates falling through 2019, gold’s investment case has strengthened as bonds become far less attractive investments in relative terms.”
Investment is a marginal source of gold demand (the jewellery industry is the biggest source of demand), with real interest rates the key to its investment appeal. In a negative real rate environment, gold is more favourable than Treasuries. Recent negative real US dollar interest rates have been a boon for the gold price, Morningstar says.
In addition, demand for gold investment through ETFs tends to rise as the gold price rises.
Morningstar says: “We expect 2020 gold demand to be 8 per cent higher than 2018, leading to our increased 2020 price forecast of US$1500 an ounce, up from our prior forecast of US$1300 an ounce.
Jewellery demand in India and China, the two biggest markets, is growing more slowly than expected, leading to a weakening of the gold price by 2022.
“We expect mid-cycle gold demand to be 9 per cent lower than our near-term forecast, with prices declining to US$1360 an ounce by 2022.”
Morningstar cautions that ETF-held gold has reached record levels, equivalent to nearly a year’s worth of mine production. Investment-driven buyers, especially through ETFs, can quickly sell when real interest rates rise, it says.
“Unwinding of ETF holdings would significantly weigh on price and the vacuum left by declining investment demand won’t be filled by other categories,” it says.
With gold almost 25 per cent higher than our long-term forecast, Morningstar sees limited investment opportunities among the gold miners we cover.
“We are positive about the potential for Newcrest to continue to improve its mines and develop new ones, and for Independence Group and Regis Resources to enjoy further exploration success. However, the forecast for declining gold process outshines any operational upside, leaving the shares trading generally above our fair value estimates.
“We expect jewellery demand to grow at 2.2 per cent a year to 2510 tonnes by 2024. Jewellery is the biggest source of gold demand, and China and India account for 60 per cent of global demand.
India and China’s gold jewellery purchase intensity – the amount spent ongold jewellery per person – has fallen roughly in line with that of the US. In both countries, their government have taken steps, including higher taxes, to limit gold iports.
In the past, gold jewellery consumption in both countries tended to rise quickly with increasing incomes. That relationship has changed.
“In our prior forecast, we had assumed that increased gold jewellery purchases fueled by rising incomes in China and India would necessitate the opening of new mines to meet demand. With the updated forecast for a fall in midcycle demand, we anticipate that current mine production will be enough.”