Credit Suisse on gold and gold equities. Decidedly bullish for a bank

Bank analysts tend to blow with the wind.  Not so long ago almost any bank you could care to name was predicting dire things for the gold price this year.  Now, three months into 2016 with gold up around 15%, most of the banks are falling over themselves to, at the very least, recant on last year’s year-end projections and see better price averages over the current year.

Swiss bank, Credit Suisse, was admittedly one which was not quite as bearish on gold in its research published mid-December last year but now, in bank terms, it has turned decidedly bullish seeing more price upside ahead.  In its latest analysis it sees gold reaching $1,300+ on continuing gold ETF buying and the perceived beginnings of a downturn in new mined supply. (We suspect however that any downturn this year won’t make any appreciable difference to supply/demand fundamentals, but might have an impact on perception, which is perhaps the most important factor of all in any positive gold price movement.)

Overall Credit Suisse has raised its average price forecast for the year by 10% to $1,270 per ounce and by 12% for 2017 to $1,313 an ounce.  For a conservative bank this year’s forecast is actually a pretty strong one given that gold has only so far briefly touched this level on the spot market and the average price to date is only around $1,180 an ounce with three strong months already behind us.  To reach the $1,270 average suggests that gold will likely have to sit in the $1,250-$1,350 range for most of the rest of the year, perhaps spiking higher at its peaks – maybe a tall order given the summer doldrums lie ahead.  But there’s little doubt gold has regained a certain amount of momentum this year, but can this continue?

(Interestingly fellow Swiss Bank, UBS, is not nearly so positive on gold this year.  Its prediction is for an average gold price for the year of only $1,225 which suggests no significant upwards price moves of any longevity lie ahead in the opinions of its analysts.)

Back to Credit Suisse though.  It points out that the combination of declining real interest rates, the Fed’s rate hike deferral, a weaker US dollar, and safe haven demand drove ETF holdings 9.9 million ounces (over 300 tonnes)  higher in Q1, from 47 million ounces to 56.9 million ounces, while the gold price rose from $1,054/ounce to peak at $1,272/ounce.  It doesn’t believe a return to the early year $1,150/ounce level is likely.  It also looks for continuing central bank purchases on the grounds that they have as good a reason as ever to diversify into fungible assets whose value cannot be printed away by other central banks.  This doesn’t seem to recognise, though, that the only central banks that really seem to be buying gold on any kind of regular basis so far are those of Russia, China and Kazakhstan, which represents a fairly small universe.  Whether others are in the process of following suite is certainly not apparent as yet.

On gold ETFs the Credit Suisse analysts feel that buying will continue given the imposition of negative and/or near zero interest rates which makes bonds no longer attractive and gold a potentially safer option.  One of the biggest arguments that the anti-gold proponents use is that it pays no interest.  But no interest in a relatively safe asset is better than paying banks to hold your cash!

On silver the bank is rather less positive in its opinion, obviously not believing in silver’s historical performance vis-a-vis gold where it usually rises at a faster rate in a rising precious metals price environment.  Indeed it reckons the gold:silver ratio could again rise, retesting recent highs, due to what it sees as stronger fundamentals in gold, lack of major drivers in silver fundamentals and a heightened geopolitical risk scenario which it feels favours gold over silver.  Silver, though tends to confound so that might be considered a risky prediction! In fact though, with a predicted average silver price for the year of $16.26, this represents a higher percentage increase over the current silver price in absolute terms than the predicted gold price average over and above the current gold price!

On gold equities, despite a 60% rise in gold stocks in Q1 it feels there is still upside ahead.  It points out that it has highlighted in its recent past research (July 2014 and Dec. 2015), that companies have spent three years reducing costs and are positioned for a period of margin expansion with a flat or rising gold price. It also points out that silver equities have rallied too - up 48% in Q1 and believes these will also trend higher over the year along with the silver price, but still underperform gold equities - much  in line with its metal price predictions.

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