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As we went to publish this edition of the Gold Tracker, it had been our observation that consensus on the gold price had become almost universally positive. We had also noted over the last few weeks that silver had finally begun to outperform gold – one of the last elements that had been missing from the bull market landscape and signalling to us the further maturation of positive gold market sentiment.

A few pink flags in a maturing gold bull market

However, a couple of cautionary elements had also begun to emerge. We saw stories in the paper of university students and rugby players recounting happy tales about the money they have been making in gold bullion and gold equities: Just close your eyes and buy – what could possibly go wrong? From a more technical point of view, some key gold equities had stopped outperforming the gold price. In the last few weeks (from 21 July), the A$ gold price rallied a further ~10% to the end of last week and set fresh all-time highs. Despite this exciting environment, the ASX Gold Index (XGD) was up only 3% and benchmark names struggled to maintain recent highs – several were actually down over that period. Whether this represented a bearish view on the gold price creeping into the market, or simply buying fatigue, it was a notable shift in sentiment.

We should not be surprised that some volatility is emerging. Our latest price charts show the gold and silver prices well extended above their moving averages and US 5yr TIPS oversold. Gold and silver had become overbought on standard RSI indicators. The mean reversion of the gold-silver ratio from multi-decade highs was spectacular. A correction of sorts was looking due and valuations close to all-time highs for bullion and equities presented a profit-taking opportunity for many.

Overall, still a supportive price environment: buy the dip

Still, while this price move is technically damaging and we’ll now be looking for some consolidation to provide support to the medium-term outlook, we see the gold price environment remaining favourable. Gold and silver prices in both US$ and A$ terms remain above key support levels, gold remains relatively cheap in relation to US Equities (as measured against the Dow Jones Industrial Average) on a 10 year average basis and, importantly, real interest rates remain at 7-year lows, deep in negative territory. The economic impact of COVID-19 restrictions and second and third wave infections remain a rolling and uncertain factor in the outlook. These are, in our view, likely to remain catalysts for Government stimulus packages and loose monetary policy settings across key global economies for the foreseeable future, keeping downward pressure on real interest rates. Finally, from a trading perspective, COMEX net long gold positioning remains elevated (at least until the day it doesn’t).

To put the current market in perspective we have taken a look at the top-20 weekly gold price gains since 2005. This encompasses arguably four previous bull markets in gold, prior to the current one. So far, the biggest weekly gains of this market make just three appearances in a list dominated by gold’s rally out of the GFC – possibly the nearest comparable to our current circumstances. So, while we can see this gold bull market maturing and that some consolidation to take the heat out of it is to be expected, we remain of the view the environment is supportive and this may be a ‘buy the dip’ opportunity.

Bell Potter Precious Metals Coverage

Regis Resources Ltd (RRL)
Market Cap: $2,771m
Price: $5.45/sh
Target Price: $5.72/sh
Recommendation: Buy
RRL is one of our top picks among the ASX-listed gold producers due to its strong balance sheet, low costs, capital efficient growth and high shareholder returns. Furthermore, we view RRL’s 100%-owned organic growth options as a strategic advantage vs peers and the McPhillamys development project in NSW as undervalued by the market.
Gold Road Resources Ltd (GOR)
Market Cap: $1,474m
Price: $1.68/sh
Target Price: $1.80/sh
Recommendation: Hold
Gruyere’s production ramp-up is essentially complete, with ore production at design levels. Recent in-fill and extension drilling below the previous pit outline has seen the Gruyere JV upgrade the Measured and Indicated Resource component by 29% after mining depletion and lift total Gruyere Resources to 6.6Moz at a gold price of A$1,850/oz ahead of an updated Reserve later in the year. GOR’s 2020 guidance for its share of Gruyere production is 125-142.5koz at an average AISC of A$1,100-A$1,200/oz. GOR 100% owned regional exploration continues in its $26m 2020 exploration budget.
Westgold Resources Ltd (WGX)
Market Cap: $912m
Price: $2.17/sh
Target Price: $2.90/sh
Recommendation: Buy
Production from sub-level caving at Big Bell is ramping-up after a delayed start from discovery of greater strike extension to the orebody that added 0.3Moz to the Resource. Big Bell was recently operating at about 0.5Mtpa rate and is expected to reach the target rate of 1Mtpa by the end of 2020, marking the completion of WGX’s four year mine refurbishment program. WGX is now generating meaningful and growing free cash flow from its sole focus on the three Murchison operations which are now largely based on higher grade underground mines.
De Grey Mining Ltd (DEG)
Market Cap: $860m
Price: $0.72/sh
Target Price: $0.69/sh
Recommendation: Buy (Spec)
DEG is a gold exploration and development company, focussing its activities on the Mallina Gold Project (MGP) located 60km south of Port Hedland in WA. Over the last four years, DEG has expanded the area of the MGP to 1,500km2 and grown the Resource base ~525%, from 346koz @ 1.6g/t Au in February 2016 to 2.2Moz @ 1.8g/t Au as at April 2020. In 2019, a new style of intrusion-related gold mineralisation was recognised at the MGP and a significant discovery made at the Hemi prospect. DEG is now ramping up its exploration efforts, with the objective of delivering significant Resource growth.
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Important Disclaimer—This may affect your legal rights: Because this document has been prepared without consideration of any specific client’s financial situation, particular needs and investment objectives, a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the proper authority of such licensee, who has provided you with this report by arrangement with Bell Potter Securities Limited) should be consulted before any investment decision is made. While this document is based on the information from sources which are considered reliable, Bell Potter Securities Limited, its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility to inform you of any matter that subsequently comes to its notice, which may affect any of the information contained in this document. This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. This is general investment advice only and does not constitute advice to any person.
Disclosure of Interest: Bell Potter Securities Limited receives commission from dealing in securities and its authorised representatives, or introducers of business, may directly share in this commission. Bell Potter Securities and its associates may hold shares in the companies recommended.
Horizon Resources (HRZ):
Disclosure: Bell Potter Securities acted as Lead Manager to Horizon Resources’ (HRZ) $2m Placement in March 2020 and received fees for that service.
DeGrey Mining (DEG):
Disclosure: Bell Potter Securities acted as Lead Manager to DeGrey Mining’s (DEG) $22m Placement in July 2019, Lead Manager to $5m Placement in November 2019 and Joint Lead Manager to the $31.2m Placement in April 2020 and received fees for those services.
Chalice Gold Mines (CHN):
Disclosure: Bell Potter Securities acted as Joint Lead Manager and Bookrunner to Chalice Gold Mines’ (CHN) $30m Placement in May 2020 and received fees for that service.
Xanadu Mines (XAM):
Disclosure: Bell Potter Securities acted as Lead Manager to for Xanadu Mines’ (XAM) $1.1m Placement in May 2020 and received fees for that service.
David Coates holds long positions in shares in EVN, NST, OGC, RRL, SBM, RSG, PNR, WGX, and SLR.