The gold pullback may prove temporary as negative global nominal interest rates and policy skepticism should drive support.
While upside U.S. employment surprise may have shifted market anticipation on Federal Reserve policy action towards an initial interest rate move higher, we contend other macro and micro trends should continue to provide support for gold prices. Accelerating monetary policies pushing negative real and nominal interest rates through global central bank balance sheet expansion driving higher non-dollar gold prices, supportive gold central bank, physical demand, and technicals should allow prices to recover from pull trends.
As mining-management teams continue to communicate with investors, cost and capital successes and goals show a more sustainable business model going forward; we believe selected gold equities can outperform. We rate Agnico Eagle Mines, Coeur Mining , Gold Resource  and Newmont Mining as Buys with Barrick Gold , Hecla Mining and Pan American Silver as Neutral.
We continue to recommend Newmont Mining among large-capitalization producers, Agnico Eagle among mid-cap gold companies, Coeur Mining among silver-oriented miners and Gold Resources among small-cap gold producers. We believe stronger U.S. dollar, global central bank withdrawals of liquidity and a reversal of net bullion purchases, a higher level of positive real interest rates, further delayed timing of development projects and higher-than-expected cost pressures could impact our valuation views.
Although many market participants appeared a bit more convinced of the implicit strength in the latest jobs report, our Chief Economist Lindsey Piegza believes that the recent jobs report was unable to instill confidence in an improving quality of job creation in the U.S. Thus the underlying juxtaposition for the Fed remains: strong payrolls implying a need for liftoff, and still lackluster wage and quality job creation implying the need for further accommodation. Lindsey remains convinced the Fed is still leaning towards the latter. She believes the Fed will remain patient, waiting for realized improvement before adjusting monetary policy.
While U.S. is moving towards a tightening cycle (we expect a rate increase in 2016), major economics such as Europe and China continue to pump liquidity into their systems. Last week, China’s central banks cut the amount of cash that banks must hold as reserves, the first industry-wide cut since May 2012.
Last week, the new government in Greece dropped calls for a write-off of its foreign debt and instead proposed official creditors swap debt for growth-linked bonds. Despite that, there is a growing concern amongst economists about the risk that Greece exits the Euro-zone.
Crude is India’s largest import item by value, followed by gold. Together they account for almost half of the country’s imports. The steep decline in crude prices has lowered India’s import bill considerably, to the point that the country recently lifted some of the import restrictions on gold. Given improvement in current account deficit, industry sources believe the government may consider 2%-4% import duty reduction.
Energy represents 20%-30% of gold miners’ operating costs. The recent 50% decline in energy costs has helped gold mining companies trim costs across operations on their unhedged position. We estimate that domestic and contractual labor, and local administration costs, all paid in local currency, make up 25-50% of a gold miners’ operating costs. Australian, Canadian, Mexican currencies have dropped nearly 10%-15% since June 2014. Unhedged currency exposure could have meaningful impact on operating & capital costs.
-- Michael S. Dudas
-- Satyadeep Jain