Credit Suisse Raises Gold, Silver Price Targets To $1,500; $18.75, Sees "Significant Physical Deficit"

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Gold shines again, hits our prior peak price six months ahead on Brexit

A gold price of US$1,350/oz was achieved briefly last week. This level was the peak price that we previously expected by 1Q-17. The Brexit result has pulled forward gold prices. Prolonged strength, on prolonged macro uncertainty.

A common argument we hear from gold participants is that gold is currently benefitting from a fear trade on Brexit, and that may indeed be the case. But we think this recent fear trade leads to something more enduring (similar to the 1Q-16 catalyst of China weakness and global implications). We forecast the gold price to increase through 2016 and believe the $1,500/oz mark could be tested by late 2016 or early 2017 as the macro implications of the Brexit vote are clarified, and the 8 November US election weighs on sentiment. Even before the Brexit vote, we saw positive price drivers: a strong chance of additional QE from the Eurozone, a 12-18 month period of negative real rates in the US and continued wealth diversification globally from central banks and consumers given the uncertain macro environment.

We believe the surprise Brexit vote has solidified and intensified macro and political uncertainty and extended the timeframe for a negative real rate environment in the US (ETF buyers), and potentially abroad (bar & coin buyers). The Brexit time-clock could begin in October 2016 and extend to October 2018 when negotiations between Britain and the EU are expected to conclude. In the interim, Scotland and potentially (Northern) Ireland may seek independence referendums in order to remain in the EU. There may also be further votes tabled in other EU nations which will continue to raise the question of the Eurozone's sustainability.

Gold price forecasts revised upwards

Gold market deficits in 2016 and 2017 drive our higher price forecasts. We increase our investment demand forecasts for 2016 and 2017 to reflect continued strength from ETFs and bar/coin hoarding. Meanwhile, we continue to expect mine supply to decline over the next three years. We forecast the gold price to increase through 2016, averaging $1,475/oz in 4Q-16 and $1,500 in 1Q-17 with a price average of $1,450 in 2017.


Our LT gold price forecast increases to $1,300/oz from $1,200/oz as we incorporate our expectation of long term gold demand from a variety of drivers; including central bank diversification and consumer asset diversification in light of the current global economic outlook.

CS on silver:

Stronger financial asset drivers

The silver price continued its rally and outperformance vs. gold in 2Q-16, up 12% QoQ in absolute terms (2Q-16 average: $16.8/oz), compared to the gold price increase of 6%. Demand for silver has increased, not for physical/industrial uses, but as a precious metal financial asset. We believe there are international capital flows towards safe-haven asset classes due to a higher geopolitical risk premium on other assets, the FOMC’s focus on “global risks”, and a potentially toxic US election weighing on the USD. Against the higher demand we note that there is lower silver mine supply.

Revised silver price forecasts including LT to $20/oz

Based on our multi-factor regression model, we have made upward revisions to our silver price outlook of 6% to 15% throughout our forecast period, primarily reflecting a stronger gold price forecast and lower expectations for mine supply growth. Most significantly, our LT price moves to $20/oz from our previous $17.9/oz.

On supply & demand fundamentals, we forecast the physical market will be in a significant deficit of 114Moz in 2016 and 55Moz in 2017, and return to balance in 2019.

As for gold equities...

Gold equity outperformance to continue, upgrade Alamos and  Yamana to Outperform and IAMGold to Neutral:

We upgrade Alamos to Outperform from Neutral due to its strong project pipeline, favourable FX exposure, balance sheet and exploration opportunities. Yamana is upgraded to Outperform from Neutral as we see it continuing to benefit from gold leverage, with potential for a re-rating through portfolio optimization, execution on debt reduction and exploration success. IAMGold is upgraded to Neutral from  Underperform, as we believe it is turning the corner on operational and financial performance.

Gold top picks

In the gold space, our top pick is Agnico Eagle (AEM) for its strong exploration and project pipeline, favourable growth profile over the next five years, operational consistency and strong balance sheet. AEM trades at 1.44x P/NAV, a slight discount to the large cap average of 1.52x. AEM is on the Credit Suisse Global Focus List.

Eldorado (EGO) is a top pick for its potential P/NAV re-rating with a tighter focus on longer life assets. We note that EGO has delivered against production guidance for the past three years and is a consistent operator. EGO's current valuation at 0.87x NAV is at a discount to our coverage average of 1.18x.

Detour (DGC) is also a top pick due to its long reserve life (+22 years), strong FCF, scale (+0.5Moz/year) and location in Canada. It trades at 1.11x P/NAV vs. our coverage average at 1.18x and senior gold equities at 1.52x.

Other Outperform-rated stocks are Barrick, Newmont, Yamana and Alamos: We like ABX for its gold leverage and capital allocation strategy, with a minimum IRR threshold targeted. Newmont for its operational consistency and attractive relative valuation vs. ABX and GG. AUY for its gold leverage and potential upside through portfolio optimization, balance sheet deleveraging and exploration opportunities. AGI for its strong project pipeline, favourable FX exposure, balance sheet and exploration opportunities.