More fiscal deficits, more quantitative easing - more reasons to own gold; initiating coverage on African Barrick Gold, Centamin, Randgold Resources and Yamana Gold
14 November 2012
Bart Jaworski

We are initiating coverage on the gold sector and on African Barrick Gold ('Neutral', 480p price target), Centamin (Neutral', 77p price target), Randgold Resources ('Outperform', 8340p price target) and Yamana Gold ('Outperform', 1382p price target).

Although some gold equities have already started to move, the group is still inexpensive: the HUI/gold ratio is one standard deviation below its 15-year mean – typically an excellent buying signal.

We think gold is likely to move higher over the next few years on continued inflation fears, negative real interest rates and geopolitical tensions. The recent abatement of euro-zone panic, in conjunction with dovish announcements by the Federal Reserve on QE3 and the re-election of President Obama have, in our view, removed a great deal of the uncertainty that has kept a lid on gold and gold equities over the past 12-18 months.

In our twin report ("Gold fundamentals and the Davy gold regression model"), also issued this morning, we note that our positive view on gold is likely shared by many gold market observers, especially following the QE3 announcement. In order to test our theory and add more rigour to our view, we constructed the Davy Gold Regression Model (DGRM). Drawing on ten key macro-economic forecasts (from the Federal Reserve Bank of Philadelphia, Oxford Economics and EIA), DGRM predicts higher near-term gold prices, with projections of US$2008/oz by mid-2013E.

We recommend buying a basket of select gold equities on seasonal strength in the gold price and the approaching US debt ceiling/fiscal cliff negotiations. Our top pick is Randgold Resources followed by Yamana Gold.