US gold prices have climbed again today after surging more than 3% in the previous session as the US Federal Reserve cut interest rates to help soften the economic blow from the coronavirus outbreak.
Spot US$ gold prices rose 0.3% to $1,644.97 an ounce, having registered its biggest one-day percentage gain since 2016 in the previous session.
US gold futures climbed 0.2% to $1,646.80. The Fed cut interest rates in an emergency move to safeguard the world's largest economy from the impact of the coronavirus epidemic.
Canaccord Genuity recently published a report highlighting the recent rise in US$ gold prices and its impact on ASX listed mid- and small-cap gold producers and developers/explorers.
Following is an extract from Canaccord Genuity’s report:
Go for gold
US$ gold prices at 6-year highs, while A$ gold at an all-time record: US$ gold prices have hit US$1,659/oz (at the time of writing), up 10% YTD, and at a level not seen since 2013. Similarly, A$ gold prices have also moved higher, up 15% YTD, trading at record highs of A$2,508/oz.
Supportive underlying macro compounded by safe-haven buying on coronavirus fears: Ongoing supportive macro factors for gold include huge amounts of negative-yielding debt, negative real rates, ongoing central bank easing, absence of inflation, and increased central bank buying. More recently, fears of the spread of the coronavirus beyond China have spurred a wave of safe-haven buying.
Gold equities - undervalued relative to gold price (and by historical standards?): Our gold producer coverage is trading at an avg implied gold price of US$1,334/oz, -9% vs spot. Similarly, the avg m/cap weighted P/NAV of our producer coverage is 0.82x, vs recent longer-run averages of +1x. Australian gold equities also look undervalued by historical standards, with the ASX Gold Index only now back to 2011 levels, despite A$ gold prices having increased by 101% over the same period. We advocate increasing exposure to gold equities as a hedge against current volatile market conditions.
Updated gold price/FX deck: Updated forward curve pricing assumptions for US$ gold see LT (2025) prices up by 9.6% to US$1,787/oz, with nearer-term (2020-2023) prices increasing by an avg of ~8.5%. Our LT AUD:USD assumptions have decreased by 3.7% to 0.669, resulting in a 14% increase to LT A$ gold prices to A$2,670/oz.
Rating & Target Price changes: Revisions to our gold/FX deck result in an average 20% increase to our mid- and small-cap producer target prices and a 24% increase for developers/explorers (see sidebar).
Rating changes include upgrades to BUY (from HOLD) for EVN, RRL, SAR and SLR.
Top pick - Mid-caps: SAR.ASX offers the best valuation upside in the immediate peer group (P/NAV 0.77x), in our view, supported by strong production growth potential (Super Pit) and 100% exposure to A$ gold prices.
Top pick - Small-caps: RSG.ASX offers attractive valuation upside (P/NAV 0.58x), in our opinion, with recent capital raising alleviating balance sheet concerns. Leverage to gold prices and operational turnaround at Syama delivering strong FCF expectations.
Top pick - Developers/Explorers: BGL.ASX's recent resource upgrade to 2.2Moz at 11.3g/t makes it a standout among pre-production peers. We see potential for further high-grade resource growth, and takeover appeal.