Despite a more tempered performance from precious metals during the third quarter of 2020, gold and silver prices still demonstrated gains and outperformed the initial expectations of analysts at Haywood Research.

During the quarter, gold prices averaged US$1,911 per oz., which was above the firm’s forecasted gold price of US$1,800 per oz. and 11% higher than the second-quarter average of US$1,714 per ounce. Silver averaged US$24.35 per oz., again above the forecast of US$18.00 per oz. and 49% higher than the second-quarter average of US$16.38 per ounce.

Year-to-date, gold and silver — up 26% and 41%, respectively — have appreciably outperformed the S&P 500 (up 6%) and the TSX Composite Index (down 3%), Haywood said.

In its latest commodities report, the firm maintains its view that the precious metals complex is still within a long-term uptrend, and believes that the ongoing pullback from peak gold price levels reached in August represents a “healthy period of consolidation.”

The trend also supports a base that Haywood expects will remain above the 2011 high of US$1,923 per oz. as “ongoing macroeconomic factors remain constructive.”

Looking ahead, the firm has lifted its fourth-quarter 2020, 2021 and long-term forecasts to US$1,900 per oz., US$1,850 per oz. and US$1,800 per oz., respectively, while acknowledging that further revisions may be needed following next month’s U.S. presidential election.

On the equities side, Haywood’s analysts note that existing valuations will continue to be modest, with many stocks trading at multiples that are seemingly discounting commodity prices below existing spot levels.

They expect this valuation discord to eventually converge, as elevated commodity prices support ongoing free cash flow generation, net debt reduction, accretive industry consolidation, and shareholder returns via dividend yields and share buybacks. In turn, such trends could “provide generalist investors with additional confidence to allocate capital into the sector,” Haywood said.

By the end of the third quarter, GDX and GDXJ, two ETFs that track equities in the gold mining sector, closed 7% and 12% higher, respectively, with gold prices up 5% during the three-month period.

Haywood believes that this sector still resides in an “opportune state”, where commodity prices have buoyed equities and facilitated consolidation, mainly amongst the producers, as many have seen expanded margins and higher cash flow due to the higher gold price.

It is expected that merger and acquisition activities will continue in the sector, likely involving targets that are progressively smaller or less advanced in profile.

As for the out performers, the firm maintains that those companies can continue to deliver over the near and medium term, though it prefers investment positioning in gold miners that can “crystallize value through organic growth” from drilling to operations.

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