Capital markets firm Stonecap Securities has revised its forecasts for precious metals prices as both silver and gold prices have recently begun to move upwards.
The current 2012 year-to-date average price for gold is around US$1,650 per ounce oz while for silver it is around US$30.64 per ounce. Spot prices are currently around US$1,770 per ounce for gold and around $34.50 per ounce for silver.
The current three-year trailing price of gold is around $1,434 per ounce.
"We are revising our precious metals price forecasts to reflect both current market conditions and our belief that precious metals prices will remain strong in the short to mid-term due to ongoing economic uncertainty, recent monetary stimulus and continued central bank buying," Stonecap said in a note.
With short-term and long-term gold forecasts below spot and three-year trailing prices respectively, Stonecap is increasing its gold price forecast by $100 per ounce across the board.
For gold, Stonecap is forecasting a per-ounce price of $1,700 for 2012 rising to $1,600 by 2014 and then $1,350 for 2016 and beyond. For silver, Stonecap pegs the per-ounce price at $32 for 2012 rising to $34 in 2014 and beyond.
Increasing the gold price forecast is prudent, Stonecap Securities said, given current market activity and recent strength in the gold price. Furthermore, the capital markets firm believes that the new higher forecasts better aligns its analyses with those undertaken by mining companies when looking at M&A opportunities as many mining firms and economic studies on mining projects utilize three-year trailing prices.
Much of Stonecap's coverage universe is focused on junior mining and implicitly recognizes that junior miners represent potential M&A targets for larger mining companies.
"We are bullish on precious metals in the short and medium terms based on ongoing relative currency devaluations, ongoing monetary stimulus, continued financial market uncertainty and central bank demand, represented by recent increases in purchases of bullion," the capital markets firm said.
"Furthermore, with QE3 now definitively on the table, we believe precious metals prices will remain strong for the foreseeable future."
Ongoing economic weakness across the industrialized economies is likely to lead to continued government monetary stimulus in the form of quantitative easing or similar policies. To prevent any one national currency from appreciating relative to other national currencies, a cycle of ongoing currency devaluations seems likely. Such an environment is bullish for precious metals in all currencies.
With the announcement of QE3 on September 13, the U.S. Federal Reserve has not only provided immediate stimulus, but by indicating that the around $40 billion of monthly Fed purchases of mortgage-backed securities has no set termination date, the Fed has left the duration of this round of stimulus open-ended.
We view this as very positive for the precious metals sector as we believe monetary stimulus will likely be sustained until economic conditions improve; something that has remained elusive since stimulus began in 2008.
While the markets have recovered from their H1 2009 lows, a considerable air of uncertainty and fear persists amongst the general public, particularly in light of recent news that the economic recovery seems to be much weaker than initially hoped for.
Continued negative economic news is likely to increase the appeal of precious metals as a store of value and provides ongoing upward price momentum for precious metals.
So far in 2012, central banks have continued to be net purchasers of gold. For years, central banks were net sellers of gold, preferring to hold a basket of national currencies instead of bullion.
Based on World Gold Council data, so far in 2012, Kazakhstan has increased its gold reserve by 21.0 tons to 103.0 tons, Mexico’s gold reserves rose by 19.2 tons to 125.2 tons, the Philippines increased their gold reserves by 35.3 tons to 193.4 tons, Russia increased its gold holdings by 53.7 tons to 936.6 tons and Turkey increase its gold holdings by 93.6 tons to 288.9 tons.
With the change in price forecasts, Stonecap Securities also adjusted its ratings and price targets on a number of producers in the sector.
Great Panther Silver Limited (TSE:GPR) remains "Sector Perform" and the target has been increased to $2.40 from $2.00.
"While Great Panther offers investors strong leverage to silver (and to a lesser degree gold), we believe it is fairly valued at current precious metals prices. For investors that remain bullish on the silver space we continue to recommend Great Panther as around 70 per cent of its revenues are silver based."
"While we believe Orvana offers good value, particularly with the EVBC shaft coming online, the company’s short-term working capital issues still concern us leading us to maintain our Sector Perform rating even with the current significant return to our target price."
SilverCrest Mines (CVE:SVL) remains rated at "Outperform" while the target price has been increased to $4.05 from $3.75.
"Our target has been positively impacted by the increase in our precious metals price forecasts. With an expansion plan underway at Santa Elena that should see precious metals production double to around 4 million silver equivalent ounces by 2014, we believe that the company represents a very compelling investment opportunity at current share prices."
"St Andrew offers investors strong exposure to gold in a politically safe jurisdiction. While the company is likely to generate only limited free cash flow until 2014, the investments made at the Holloway-Hislop-Holt complex have set the stage for the company to achieve around 100,000 ounces annual gold production," Stonecap said in its note.
"Furthermore, the Taylor project, anticipated to begin production in 2014, should further increase the annual production profile of the company to around 125,000 ounces and we do not anticipate the company requiring additional sources of capital to complete this objective."
"We are expecting a number of key catalysts for the stock over the near term which includes a new mine plan at its San Francisco mine in Sonora, Mexico as well as metallurgical test work currently underway."
We recommend investing in quality precious metal producers that have demonstrated the ability to generate positive cash flow, have strong growth profiles and/or have low cost structures per ounce of metal produced, such as SilverCrest and Timmins.
While precious metals and precious metals equities have largely generated negative returns over the last year, the momentum of the market has changed dramatically since the end of August.
With the announcement of QE3, we believe the positive trend in precious metals prices is likely to persist for the foreseeable future.
"We remain bullish on the sector as a whole due to the reasons outlined above (ongoing fiat currency debasement, financial market uncertainty, continued monetary stimulus and central bank demand)."