Fed Push for Inflation Implies Support for Gold Price, Miners

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Lacking significant inflation to help drive up demand, gold prices have dropped more than $200 an ounce in the past 12 months. However, it appears that gold is going to get some help as the U.S. Federal Reserve and other central banks continue to keep policy rates low in an effort to fight off deflation. With inflation rates still well below the Fed’s 2% target, and its own latest estimate that the target will not be reached until 2017, the Fed may no longer be “patient,” but it is not prepared to make any near-term move to raise rates.

Analysts at Sterne Agee put it this way:

Accelerating monetary policies pushing negative real and nominal interest rates through global central bank balance sheet expansion driving higher non-dollar gold prices, supportive eastern physical demand, and technicals should allow prices to recover.

The analysts noted that Fed officials have lowered their inflation forecast for 2015 from a prior range of 1.5% to 1.8% to a new range of 1.3% to 1.4%. The Fed has also lowered its median forecast for interest rates from 1.1125% to 0.625% in 2015 and from 2.5% to 1.875% in 2016. Sterne Agee’s chief economist believes that the first Fed rate increase has been pushed out beyond 2015.

While the United States gears up for a raise in interest rates, more monetary easing is being instituted in Sweden, and some observers think Norway will be next. The analysts note, “Deflationary fears around the world continue to indicate possibility of more global stimulus.”

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As for the gold mining companies, Sterne Agee pointed out that about 20% to 30% of operating costs are down to energy and that the recent 50% drop in crude oil prices has helped the miners trim costs on their unhedged production. The analysts also note that another 25% to 50% of miners’ costs are domestic labor and administration that is paid in local currency: “Unhedged currency exposure could have a meaningful impact on operating and capital costs.”

Sterne Agee maintains a Buy rating on the following four mining companies and a Neutral rating on three others.

Agnico-Eagle Mines Ltd. (NYSE: AEM) sports a 52-week trading range of $21.65 to $42.41 and a market cap of around $6.1 billion. The company’s forward price-to-earnings (P/E) ratio is a rich 35.7, highest of any of the miners. Shares traded at $28.60 in the late morning Thursday. The 12-month price target on the stock is $37.14.

Coeur Mining Inc. (NYSE: CDE) has a 52-week trading range of $3.37 to $11.17 and traded down about 3.3% Thursday morning at $5.02. The company’s forward P/E ratio is negative and its 12-month target price is $5.98.

Gold Resource Corp. (NYSEMKT: GORO) has a market cap of just more than $150 million, and its 52-week trading range is $2.62 to $6.35. The forward P/E ratio is 4.73m and the target price is $10.00. Shares traded down about 0.2% Thursday morning at $2.84.

Newmont Mining Corp. (NYSE: NEM) has a market cap of nearly $11.5 billion and a 52-week trading range of $17.60 to $27.40. Shares traded up about 0.2% Thursday morning to $23.03. The stock’s forward P/E ratio is 17.73 and its price target is $26.21.

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Sterne Agee’s Neutral-rated companies were Barrick Gold Corp. (NYSE: ABX), Hecla Mining Co. (NYSE: HL) and Pan American Silver Corp. (NASDAQ: PAAS).