National Bank Financial has increased its precious metal forecasts both in the near and long term, after the Fed delivered a "double stimulus espresso while still doing the twist."
As a result of both the Fed’s and ECB’s announced open-ended round of additional asset purchases, National Bank Financial said in an industry note yesterday that it believes the risk of deflation has been "greatly reduced."
Last week, the Federal Open Market Committee announced a two-pronged approach to battle the nagging issue of anemic economic growth and the risk of deflation.
It extended its near zero fund target rate by six months out to mid-2015 and announced a new open-ended asset purchase program, targeting mortgage-backed securities, at a pace of US$40 billion per month.
When combined with the existing Operation Twist, National Bank said its economics team calculates the Fed’s holdings of long-term securities growing by US$85 billion per month for the remainder of 2012.
The bank increased its gold and silver price assumptions to US$1,800/oz and US$35/oz, respectively, through 2016, from US$1,600/oz and US$27.50/oz, previously.
In 2017 and beyond, it boosted its price assumptions for gold and silver to US$1,400/oz and US$27/oz, respectively, from US$1,200/oz and US$22/oz.
Gold for December delivery was lately up by $1.00 to $1,772.0 an ounce.
"These price adjustments may be subject to further increases if the potential upcoming fiscal cliff causes the Fed to introduce further liquidity or the multiplier effect starts to have an added impact," National Bank Financial's mining analysts and associates noted.
"It is worth noting that we believe the Fed’s decision to reflate prior to the Federal election has compromised their perceived political independence."
The financial institution said it expects share prices to appreciate aggressively in the near term as margins expand.
"As with past bullion price increases, we believe the easier money to be made is by investing early.
"Since gold is a monetary asset, the very driver for gold prices going higher in a given currency eventually translates into higher future costs both through the FX market and through higher inputs (i.e., oil, regents, labour, etc)."
Consequently, the analysts noted that the best margin expansion occurs shortly after the liquidity event, and thus should translate into better share price performance.
"This is especially true as it usually occurs before the onset of late cycle margin pressures as input costs start to increase and global fx starts to rebalance.
"While margins are expanding, we prefer miners over royalty companies," the bank said.
Indeed, National Bank said the reduced deflation risk puts developers back on the front burner. This is because higher risk of deflation means an increased risk of dilutive equity financing.
"We now believe the market is likely more willing to fund development-stage assets. As such, we believe some of the most undervalued assets in the precious metals space are high quality development assets."
The bank took note of low capex intensity projects, with higher rates of return, "which provide the corresponding companies stock the opportunity to re-rate in the near-term."
The new environment should also put producers with the highest growth potential back to the forefront, National Bank added.
Top picks for the firm in the senior intermediate producers category was Kinross Gold (TSE:K), while Sandstorm Gold (CVE:SSL) took the top slot in the royalty companies sector.
Kirkland, which generated cash flows from operating activities of $2.4 million in the latest period, is focused on Kirkland Lake, Ontario in the Southern Abitibi gold belt. The company plans to boost production to between 250,000 to 300,000 ounces per year in several stages.