BMO raises long-term precious metal price forecasts

BMO Capital Markets has hiked its long-run gold and silver price forecasts to US$1,400 per oz. and US$18.25 per oz., increases of 16.7% and 5.8%, respectively.

The bank’s long term price forecasts have been “static” since 2015, the analysts stated, noting that “changing a long-term price is not something we take lightly, or indeed do very often.”

In the nearer term, BMO’s analysts forecast gold prices to average US$1,732 per oz. this year, a 5% increase over their earlier forecast, while silver is expected to average US$17.60 per oz. in 2020, a 2% gain over their earlier estimate.

But the analysts emphasized that higher precious metal prices won’t encourage the same kind of reckless overspending and poor decision-making the industry experienced in the past.

“Despite being a cliché in the investment world, this time really is different,” they wrote in a May 29 research note. “We are not anticipating an elevated gold price will drive a return to the bad behaviours of the past, or at least not to a widespread extent. Growth for growth’s sake has been shunned by investors and management teams alike. Costs are expected to remain relatively stable as low fuel prices and a strong U.S. dollar aid in maintaining cost bases.”

The analysts also predict an “upward trend in free cash flow” – even for some of the smaller players in the industry. “With so many gold producers generating free cash flow, it seems likely that the market may start to look to these companies as good businesses, rather than just leveraged ways to invest in gold,” the report stated, adding that the industry now has generally strong balance sheets and is managing costs well. “This can only bode well for asset allocation to the space.”

In terms of trends, the analysts forecast more zero premium mergers of producers, and a “scarcity premium” for high quality development projects and for producers “with any significant, financed, permitted growth on the horizon.”