(Kitco News) - Morningstar sees a dip in gold below $1,000 an ounce next year followed by a recovery, calling for jewelry demand to pick up in the next half decade.
The independent research provider, in a report titled “Don't Sweat the Fed: Rate-Hike Worries Create a Golden Opportunity in Mining Stocks,” also said current valuations provide bargain-hunting opportunities for gold-mining stocks. In the report, Morningstar equity analysts listed their long-term forecast for gold prices, the effect of higher interest rates on near-term gold prices, their outlook for supply and demand and their favorite picks among gold miners.
"During the next five years, there will be a profound shift in the nature of gold. It's transforming from not just a financial commodity, but to a consumer one. Over time, jewelry purchases of gold will overshadow the importance of gold buying by financial institutions, such as central banks and exchange-traded funds," said Kristoffer Inton, equity analyst for Morningstar, in a summary of the report released Wednesday.
"Despite worries about higher interest rates negatively affecting investor demand for gold, we think jewelry demand provides long-term support for gold prices and see an opportunity for investors to purchase gold-mining stocks at a discount to their fair values."
Morningstar said Barrick Gold, Eldorado Gold and Goldcorp are the “most attractively priced investment opportunities in the industry.”
Analysts said equity valuations in the sector appear to reflect expectations of gold prices below $1,000 over the long term, which is lower than Morningstar's forecast. Morningstar analysts forecast a gold price of $1,160 per ounce in current 2015 dollars, or $1,300 per ounce, unadjusted for inflation, by 2020.
Analysts said they look for prices to slip below $1,000 per ounce in 2016 because of higher U.S. interest rates and continuing deflation of mine operating costs. However, analysts also said they expect prices to recover in 2018 and 2019.
For the next five years, Morningstar analysts forecast a 4.7% compound annual growth rate in total physical gold demand, led by Chinese and Indian jeweler purchases. Jewelry will account for two-thirds of gold demand by 2020, up from a 50% share in the last five years, the firm said. The share of gold purchases from central banks and exchange-traded funds will decrease to less than 5% in the same time period.
Global mine production would need to increase by approximately 5%, or 200 metric tons, in addition to projects already in development to meet expected demand by 2020, Morningstar said.
By Allen Sykora of Kitco News; asykora@kitco.com
