Market mixed on gold outlook for 2022

Gold edges down within three-month trading range

Gold declined -0.5% to US$1,793/oz this week, trading within its three-month range between US$1,750/oz and just over US$1,800/oz, as concerns over persistent inflation have been roughly balanced by the potential for rising yields from a Fed taper.

Analysts' outlook on 2022 metals' prices, US deficits versus gold

This week we look at analysts' outlook for 2022 for gold, silver and copper prices, with overall more moderate expectations than for 2021, and consider what the relationship between US deficits and gold may indicate for the gold price next year.

Producers and juniors decline, New Found Gold (NFG) In Focus

The producing miners fell, with the GDX down -2.6%, with the peak of the Q3/21 reporting season this week, and the juniors declined with the GDXJ down -2.7%. In Focus is the TSXV's largest junior gold company, New Found Gold.

Market mixed on gold outlook for 2022

Gold declined -0.5% this week to US$1,793/oz and continued to trade within a threemonth range from about US$1,750/oz to just over US$1,800/oz, with the market apparently viewing risks for gold as reasonably balanced recently. To the upside for gold, inflation has remained persistently high for several months, and some are concerned that the Fed's hypothesis that it is only temporary, and will subside as post-global-health-crisis global supply constraints ease, may prove unfounded. However, to the downside for gold is the Fed's planned taper, and eventual rate hikes, which could theoretically increase bond yields and drive investors towards these instruments, and away from yieldless gold.

We expect that inflation will continue to surpass expectations for an extended period, likely well into 2022, and the Fed taper could prove too gradual to offset this, supporting gold. We also believe that it as much the monetary tsunami unleashed over the past year and a half that is driving inflation as it is supply chain disruptions. We expect that much of this liquidity has still yet to flood the markets and could drive up consumer prices further, and that the Fed’s taper will not mop up enough of it to really stem the tide of inflation. However, as it will still take some time for this to play out, and for the market to see the level of, and effects from, the Fed's taper, we could continue to see gold stick within this trading range through the last two months of the year and even into 2022.

Analyst's outlooks for gold, silver and copper prices into 2022 have started to come through, and we compile these in Figure 4. Overall, we would characterize the estimates as a bit more mixed than we saw for the 2021 estimates, when analysts were more bullish overall on these metals. For gold, while several analysts had been looking for US$2,000/oz gold for 2021 early this year, targets for 2022 are generally more bearish.

Only Goldman stands out for US$2,500/oz at the top end of its forecast range, with a scenario of slow growth and high inflation, and the average is US$1,865/oz for 2022, only a 2.1% gain from an average US$1,797/oz so far in 2021. However, using Goldman's lower-end forecast of just US$2,000/oz, the average would be flat yoy from 2021. At the lower end of the estimates, Credit Suisse forecasts US$1,621/oz, and Deutsche Bank US$1,650/oz, suggesting considerable downside for 2022. For silver, the average is US$27.2/oz, suggesting 6.7% upside from the US$25.5/oz average year-to-date, and Goldman again has the highest estimate, at US$33/oz. Morgan Stanley and the World Bank have the low-end estimates, at US$24.6/oz and US$24.3/oz, indicating a year-on-year decline of -3.5% and -4.7%%, respectively. For copper, the average estimate is US$4.2/oz, which would see it flat yoy, ranging from a high of US$5.0/lb from UBS to US$3.5/lb for Morgan Stanley.

What conclusions can we make about the market's expectations for the economy in 2022 implied from these metals' prices? With copper a major gauge of real economic activity, its price estimate seems to indicate flat economic demand. The moderate increase in the gold price, which is mainly driven by monetary factors, suggests that it may be lifted by inflation. With silver, which is driven by a mix of real demand and monetary factors, expected to rise, but copper flat, this could also indicate mainly inflationary expectations. Overall, these prices suggest to us market expectations for a somewhat stagnant economy and rising inflation in 2022, or stagflation.

The relationship between US deficits and the gold price

This week we look at the relationship between the US deficit to GDP and gold, with a widening deficit generally viewed as supporting gold, and a surplus as negative for gold. Deficits occur when government expenditure outpaces revenue and must be financed by government borrowing, with this expansion of bond supply tending to drive down yields, making yieldless gold more attractive. The US deficit/GDP in 2020, at -15.0%, was at its highest since the US began running widening deficits around the 1970s, and the 2021 deficit is expected to be the second highest, at -10.8%. With relatively high deficits forecast to continue in 2022 and 2023, at -6.9% and -5.7%, respectively, down from peak 2020-2021 levels, but also with the possibility to overshoot forecasts, their potential effect on gold over the next two years is unclear.

In Figures 5-7 we show the relationship between US deficits and gold price, with increasing deficits from the mid-1970s through to the early 1980s corresponding with a rise in the gold price, and the gold price flattening as deficits contracted in the late 1980s. Gold continued to decline through the 1990s, reaching a trough when the US ran a surplus through the late-1990s, with gold picking up as deficits increased through to the mid-2000s. The 2008-2009 financial crisis drove a sharp increase in deficits, and sent the gold price soaring, but the gold price fell as deficits to GDP flattened through the mid-2010s. With deficits surging since the 2020 crisis, gold has again picked up substantially.

Producers mixed as Q3/21 results season peaks

The producing gold miners were mainly down this week, with the Q3/21 results season peaking this week and most of the major producers having now reported (Figure 8). Most of the majors reporting Q3/21 saw considerable losses on a yearyear decline in the gold price, with net income in Q3/21 declining -20.2% for Barrick, -51.3% for B2Gold, -51.4% for Yamana, -8.4% for Eldorado, -161% for Iamgold, and -262.5% for Equinox. Only two major producers reported net income gains for Q3/21 this week, with Kirkland Lake up 26.2% for Q3/21 and SSR Mining up 149%. AgnicoEagle released a joint management circular with Kirkland Lake for a special shareholder's meeting for approval of matters related to their merger, and exploration results from Rand, Malartic, Upper Beaver, Hope Bay and Santa Gertrudis (Figure 10).

Canadian juniors mostly decline as gold dips

The Canadian juniors were mainly down as the gold price declined (Figure 9). For the Canadian juniors operating mainly internationally, Novo Gold reported that because of additional maintenance on a crusher, that the Golden Eagle Mill at its Nullagine project would be shut down until November 5. Lumina Gold completed the consolidation of the Cangrejos and Gran Bestia deposits to 4,999 h.a. to streamline permitting and development, with the maximum concession under the Ecuador mining code at 5,000 h.a. Bluestone filed a shelf prospectus allowing it to offer up to C$400mn in shares, Integra reported drill results from Florida Mountain and Lion One reported results from extensional step-out drilling at Tuvatu (Figure 11).

In Focus: New Found Gold (NFG.V)

NFG doubles down on drill program

New Found Gold has doubled down on its drill program at its flagship Queensway gold project in Newfoundland, and will expand its ongoing 200k m drilling program, of which 102k mn has been completed, to 400k m, and the rigs operating to fourteen from nine currently. This has been driven by some of the strongest consistent drilling results of any TSXV gold junior over the past year. However, while recent drilling results have remained strong in absolute terms, with grades high versus the sector, they have not matched the peak May and June 2021 results, with 146 g/t Au over 26 m on May 21, 2021 and 430 g/t Au over 5 m on June 30, 2021 (Figure 13).

Recent strong drilling results not buoying share price

These outstanding results drove the price to peak at US$13.1/share on June 7, 2021, and it was the best performer of the larger TSXV junior gold miners over the past year, up 129%, and has the highest market cap of the TSXV miners at US$1,481mn (Figure 14). However, it has failed to make gains for several months, and the market seems to be viewing the company as fully valued. NFG's best hope for near-term gains is likely a rise in the gold price, as we otherwise may need to see assays reported nearer to the very strong mid-2021 levels before the stock is afforded much of a lift.

'Consensus' of single analyst's estimate puts NFG as fully valued

With the consensus target price for the company consists of only a single analyst's estimate, it cannot be considered a broader average of market expectations, but the analyst is seeing limited upside, with only 7% upside to its CAD$10.0/share target, The stock also trades at a price to book ratio of 16.1x, well above the other large TSXV junior gold explorers, with Great Bear at 9.7x, Rupert at 7.1x and Tudor at 5.8x. While Rupert and Great Bear have also had strong drilling results over the past two years, Rupert has already released a resource estimate, which has taken it out of the 'hype phase' of strong drilling results, and Great Bear's strongest results were released in mid-2020, which could explain their discounts to New Found Gold.