Gold price bodes well for Aussie miners: Citi

US investment bank Citi sees “plenty of room for upward re-rating” in Australian gold miners which meet their production guidance as the price of gold continues to soar.

With June quarter production reports due to get underway next week, Citi is sticking to its forecast gold will hit $US3000 per ounce in 2025, saying Evolution Mining was its top pick in the sector.

“We continue to remain positive on the sector given positive mark-to-market on a rapidly rising gold price,” said Citi analyst Kate McCutcheon in a report.

Spot free cash flow yields ranging from 6 per cent to 19 per cent for Evolution, Newmont, Northern Star, Perseus and Regis were about twice their long-term averages of 2-5 per cent, excluding Perseus.

“There is still plenty of room for upward re-rating if gold can hold these levels and companies can deliver on guidance,” McCutcheon added.

Risks around wealth have increased amid Middle East tensions and there are also risks to the US and European property and equity markets, which should be supportive for gold according to Citi.

It comes after the price of gold shot above $US2600 per ounce last month, hitting a record high of $US2685.58. It’s up about 30 per cent this year, 44 per cent in a year and 57 per cent over two years.

The 2024 gold price rally, from $US2000 to $US2500 per ounce, has been skewed towards physical demand, particularly central bank purchases and Chinese retail sector imports. But, since mid-year financial gold traders have rushed to gain exposure via ETFs and futures and options.

Going into the December quarter, the Federal Reserve has started cutting interest rates in line with most of the advanced economies, yet the US has stayed resilient according to the latest employment data.

The main pit of Newcrest’s Telfer Mine. Picture: Will Burgess/Bloomberg

At the same time, the Middle East conflict threatens to morph into a regional conflict which may cause a damaging spike in oil prices. Meanwhile, the US Presidential election is only four weeks away.

The September US non-farm payrolls report showed much stronger jobs growth than expected and a lower-than-expected unemployment rate, as well as upward revisions to jobs growth in the past two months, fuelling expectations of a soft landing or possibly even a re-acceleration in the US economy.

After a sharp rise in US bond yields on Friday, the bond market was finally starting to agree with the economic optimism which quickly re-emerged in the share market over the past two months.

It followed the brief recession scare triggered by weaker than expected July jobs data.

However, while the US 10-year bond yield has bounced from a 15-month low of 3.60 per cent to a four-week high of 3.98 per cent in the past three weeks — a rise which accelerated after Friday’s non-farm payrolls report — the S&P 500 remained near the record high of 5762.48 points hit last week.

While there is now a wide range of views on US recession risks among US economists, the short-term takeaway from the jobs data is lessening US inflation, recession risk and rate cut potential may continue to lift US bond yields. But, the implications for sharemarkets may be more nuanced.

And considering the strength in gold and geopolitical risks from the Middle East and the US election, shares of gold miners which haven’t kept pace with the commodity may beat the overall market.

Most sharemarkets outside of China haven’t priced in recession or other risks much at all this year.

Even China’s sharemarkets have bounced 25-30 per cent in the past few weeks as a raft of stimulus measures have given hope of a looming “big bang” fiscal stimulus which is yet to be seen.

On that front, China’s markets are due to re-open Tuesday after Golden Week holidays, and the powerful National Development and Reform Commission is due to hold a press briefing from 1pm AEDT to discuss a package of policies aimed at boosting economic growth.

China unleashed a raft of stimulus measures including interest rate cuts, extra liquidity for bank lending and as much as $US340bn in sharemarket support ahead of Golden Week.

Also fuelling hopes of stimulus, a prominent Chinese economist recently said China had room to ramp up fiscal support by issuing as much as 10 trillion yuan ($US1.4 trillion) in special bonds.

But China’s sharemarket may soon reach a point where it needs to see officials deliver.