Despite a more tempered performance from precious metals during the third quarter of 2020, gold and silver prices still demonstrated gains and outperformed initial expectations from analysts at Haywood Research.
During the quarter, gold prices averaged $1,911/oz, which was above the firm’s forecasted gold price of $1,800/oz and 11% higher than the second quarter average of $1,714/oz. Silver averaged $24.35/oz, again above the forecast of $18.00/oz and 49% higher than the second-quarter average of $16.38/oz.
Year-to-date, gold and silver — up 26% and 41% respectively — have appreciably outperformed the S&P 500 (up 6%) and the TSX Composite Index (down 3%), Haywood points out.
In its latest commodities report, the firm maintains its view that the precious metals complex is still within a long-term uptrend and believes that the ongoing pullback from peak gold price levels reached in early August represents a “healthy period of consolidation.”
This trend also supports a base which Haywood expects will sustain above the 2011 high of $1,923/oz as “ongoing macroeconomic factors remain constructive.”
Looking forward, the firm has lifted its Q4 2020, 2021 and long-term forecasts to $1,900/oz, $1,850/oz and $1,800/oz respectively, while keeping in mind that further revisions may be needed following next month’s US presidential election.
On the equities side, Haywood analysts note that existing valuations will continue to be modest, with many stocks trading at multiples which are seemingly discounting commodity prices below existing spot levels.
They expect this valuation discord to eventually converge as elevated commodity prices support ongoing free cash flow generation, net debt reduction, accretive industry consolidation, and shareholder returns via dividend yields and share buybacks. In turn, such trends could “provide generalist investors with additional confidence to allocate capital into the sector,” Haywood says.
By the end of the third quarter, GDX and GDXJ — two ETFs that track equities in the gold mining sector — closed 7% and 12% higher respectively, with gold prices up 5% during the three-month period.
Haywood believes that this sector still resides in an “opportune state” where commodity prices have buoyed equities and facilitated consolidation, mainly amongst the producers, as many have seen expanded margins and higher cash flow generated due to the higher gold price YTD.
It is expected that M&A activities will continue in the sector, likely involving targets that are progressively smaller or less advanced in profile.
As for the outperformers, the firm maintains that those companies can continue to deliver over the near and medium term, though it prefers investment positioning in gold miners that can “crystallize value through organic growth” from drilling to operations.