Credit Suisse: Gold To Fare Better Than Commodity Complex In 2016; Mine Supply To Decline

January 5, 2016

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(Kitco News) – Credit Suisse says gold is positioned to outperform the commodity complex in 2016.

Analysts with the bank late last month listed a 2016 forecast of $1,150-per-ounce gold in 2016. They suggest exchange-traded-fund selling will continue but lose influence as it becomes a smaller piece of the gold market. Also, Credit Suisse said, the market has already factored in two more rate hikes.

“We forecast physical demand as a source of strength,” Credit Suisse said, adding that central banks are expected to continue buying and supply will begin to decline.

“We forecast 4% annual declines in mine supply, or 11.5% from 2015 to 2018,” Credit Suisse said. “This takes into account few projects in development since 2012, stretched balance sheets after three years of negative sector FCF (free-cash flow) and natural depletion of assets for the past three years since investment in growth stopped.”

The bank said the cost curve supports a higher price in the long term, estimating that 15% of 2015 production was FCF negative at $1,100 an ounce. However, Credit Suisse added, this increases to 46% when considering all overhead costs, such as taxes, interest, exploration, reclamation of general and administrative expenses, working capital and other costs.

“We remain of the view that $1,100/oz is not an equilibrium price as supply will likely decline at that sustained price and demand will remain strong predominately from Asia and Europe in the form of jewelry, bar and coin investment,” Credit Suisse says. “We currently forecast a $1,200/oz long term gold price.”

Reserve life has fallen from 14 to 10 years since 2011, Credit Suisse reported. The bank estimated a 54% depletion replacement at the end of 2015, although this would be an improvement over the 3% replacement rate at the end of 2014.

By Allen Sykora of Kitco News; asykora@kitco.com

Category: Gold