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By Kristoffer Inton | 12-10-2015 12:00 AM

Gold Miners Are Cheap

Valuations reflect investor expectations for gold prices that are well below our long-term forecast.

Kristoffer Inton: Fed rate-hike worries have created an opportunity to buy gold miners at a discount. The market is rightly concerned about the impact of higher rates and investor demand for gold, but a narrow focus on investor demand overstates its importance to gold's long-term outlook. 

Over the next decade it will be jewelry demand, not investor demand, that drives the gold market. Led by China and India, we expect jewelry demand to account for two thirds of gold demand by 2020 and that assumes a deceleration in jewelry demand growth for those two countries. We expect ETF and central bank purchases will account for only 5% of the market by that time. 

Gold supply growth must accelerate, but mine projects and development would be insufficient to meet demand. To avert a shortfall, we estimate an additional 200 tons of annual mine supply would be required by 2020, equivalent to about 5% of global mine production.

A prospective supply shortfall is bullish for gold prices, but significant mine cost deflation diminishes the upside. We forecast the gold price of $1,300 per ounce on a nominal basis by 2020 or roughly $1,160 in constant 2015 dollars. 

Gold miners are cheap; equity market valuations appear to reflect expectations of sub-$1,000 real gold prices in the long run, well below our long-term forecast. 

Barrick Gold, Eldorado Gold, and Goldcorp offer the most attractive risk-adjusted discounts to our fair value estimates.

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