Gold's rally has shot its bolt: OCE predicts progressive falls over next 5 years

Gold had all the right ingredients to make a break above August 2020 highs of US$2,075. 

The Russia-Ukraine war, rampant inflation, covid and recession fears briefly rallied the safe-haven asset to highs of US$2,070 on 8 March. However, the euphoria for gold-bulls was short-lived as prices quickly reversed back to the US$1,900 level.

Gold price chart (Source: TradingView)

The Australian Government’s commodity forecaster, the Office of the Chief Economist (OCE), expects gold prices to fall from an average of US$1,770 in 2022 to US$1,380 in 2027 as real bond yields lift. 

“The global economic recovery has lifted real bond yields in recent months, undermining some of gold’s appeal to institutional and retail investors,” said the OCE’s March quarterly report. 

“However, the strong inverse relationship between gold price and the real US 10-year Treasury bond yield seems to have weakened since early 2022.”

The tensions between over the Russian invasion as well as inflation, recession and covid might be factors driving the divergence. 

The OCE projects gold prices to fall an average -4.9% a year over its outlook period to 2027 as monetary policy begins to tighten as economies recover from the impacts of covid. 

Department of Industry, Science, Energy and Resources (March 2022)

“With real interest rates increasing, the opportunity cost of holding gold will rise, lowering its attractiveness as an investment asset,” the OCE explained.

A glance at gold stocks

The S&P/ASX All Ordinaries Gold Index is up 3% in the past 12-months, broadly in-line with the sideways movement of spot prices.

Even several large and mid cap gold stocks are highly profitable, the lack of upside for spot prices has weighed on any upside.

Taking a look at broker views on gold stocks:

Large cap

• Newcrest Mining (ASX: NCM)

  • Consensus views the stock as a Buy with a $30.1 target price

• Northern Star Resources (ASX: NST)

  • Consensus views the stock as a Buy with a $12.4 target price

• Evolution Mining (ASX: EVN)

  • Consensus views the stock as a Hold with a $4.39 target price

  • Brokers were not impressed by the company's soft December half-year result. Production was weak, cashflows were considered 'minimal'

Mid cap

• Perseus Mining (ASX: PRU)

  • Consensus views the stock as a Buy with a $2.00 target price

  • Macquarie flagged that all-in sustaining costs for the Sissingue Project was higher than the brokers forecasts

• Gold Road Resources (ASX: GOR)

  • Consensus views the stock as a Buy with a $1.80 target price

  • Brokers were generally positive about the company's recent takeover offer for GDO Gold

• Ramelius Resources (ASX: RMS)

  • Consensus views the stock as a Strong Buy with a $1.77 target price

  • Macquarie notes that the company expects to bring its Mt Magnet Project online sooner-than-expected