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Gold price rally to continue as recession fears fan purchases

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Gold price rally to continue as recession fears fan purchases

Gold is expected to continue its strong run as the risk of further escalation of trade disputes between the U.S. and China, a potential for currency intervention, geopolitical tensions and downside risks to global growth linger.

The anticipated slow growth for the two countries, a dovish central bank policy, declines in real rates, weaker equities and growing concerns of a recession are driving investors into the safe-haven asset, UBS analysts wrote in an Aug. 14 note.

The ongoing uncertainty in the global market is expected to persist, making it difficult for investors to plan for the future.

"In this environment of rising uncertainty and falling opportunity costs of holding gold, the yellow metal stands out as a clean way to take a strategic position both for institutional investors as well as the official sector," UBS wrote.

The global research team at Bank of America Merrill Lynch said in an Aug. 15 note that a risk of a short-term decline in prices may arise from record-long futures markets; however, there is room for further gold purchases by investors and central banks.

Analysts at BofA Merrill Lynch estimate that investors will have to increase gold purchases by 7% in 2020 to maintain prices over US$1,500 per ounce, which is not unrealistic considering assets under management since the start of the year at physically backed exchange-traded funds climbed 8.9% year over year.

A return to US$1,250/oz is unlikely unless investors reduce their gold purchases materially, the analysts said.

BofA Merrill Lynch said it disagreed with the sentiment that gold's weight in global portfolios may have become overextended as investor gold holdings, excluding central banks, are at just 2.7% of equity market cap, less than half of the over 6% levels seen in the 1970s.

"We believe the popularity of gold in investor portfolios is set to increase from here. Indeed, if history is a guide, precious metal allocations could more than double," the analysts wrote, adding, "If concerns over central bank credibility and equity/fixed income valuations increase, gold could easily see further inflows."

Meanwhile, central banks in developed nations have stopped selling their holdings, and monetary authorities in emerging markets have increased their exposure to gold after decreasing it for almost 40 years.

According to BofA Merrill Lynch, the risk/return profile of a conservative portfolio is optimal if just below 5% of funds are allocated to gold, and it estimates that about 12% of global central banks have holdings under that threshold.

If monetary authorities of the remaining central banks lift their allocations to what the analysts consider optimal levels, it would result in additional purchases of 5,870 tonnes of gold, "which is sizeable given last year's scrap and mine supply summed up to 4,600 tonnes."

"We acknowledge that portfolio optimization is not the only motivation behind central bank gold purchases, with the role of gold as a safe haven asset and de-dollarization other popular motives," BofA Merrill Lynch added.

UBS wrote that silver prices are also expected to improve due to "spillover benefits" of the gold price surge and some influence from industrial metals.

The analysts increased their silver price forecast for 2019 to an average of US$16.10/oz, from US$15.90/oz forecast previously, and for 2020 to an average US$17.60/oz from US$17.30/oz. "Silver risks are skewed to the upside in our view, and prices could test [US]$18 in the coming months," UBS added.

In an Aug. 15 note, SP Angel maintained its buy rating for Keras Resources PLC and increased valuation for the company to 1.08 British pence per share from 1.04 pence per share.

The valuation increased on the back of a rise in the share value of Keras' 33.8%-owned Calidus Resources Ltd. to 3.5 Australian cents per share. Calidus represents about 58% of the value of Keras, with the remaining value calculated on expected cash flows from the Nayega manganese mine in Togo.

Meanwhile, BMO Research said Aug. 14 that it initiated coverage on gold miner LeaGold Mining Corp. and silver-focused New Pacific Metals Corp. with an outperform rating based on "stronger underlying fundamentals."

LeaGold, with a price target of C$4.00 per share, is expected to grow more than its peers in the coming years, driven by the phased expansion of its Los Filos mine in Mexico and restart of the Santa Luz mine in Brazil.

Pacific Metals has a price target of C$3.75, with shares expected to re-rate higher if a National Instrument 43-101-compliant resource estimate for the Silver Sand project in Bolivia is delivered at year-end.