RBC Outlook on Gold Stocks: Gold Price on a Mild Upswing, Valuation and ROC are Driving Factors for Gold Stocks.

International financial giant Royal Bank of Canada (RBC) recently released a global outlook report for precious metal stocks, stating that the changes in monetary policy and global elections in 2024 have brought a turbulent period to an end for the price of gold. However, the RBC analysis team predicts that the price of gold will once again show positive momentum and reach new highs in 2025, mainly due to the core drivers of gold demand still being present. Gold demand is expected to continue to be supported by major central banks and safe-haven investments globally, although the upward trend will be more moderate compared to 2024. RBC maintains an optimistic outlook for stocks focused on gold, although this view is currently based on RBC's valuation perspective rather than previous commodity outlook perspectives. Precious metals refer to gold, silver, and platinum group metals, generally emphasizing gold and silver. 2024 was a strong year for gold, despite market volatility at the end of the year. The price of gold ended the year at $2625 per ounce, a 27% increase, outperforming broader stock and commodity returns, even surpassing the S&P 500 index. Despite increases in nominal and real yields (10-year US Treasury bond yields rose 69 basis points to 4.57%, 10-year inflation-protected bond yields rose 17 basis points to 2.34%), along with a strengthening US dollar (the US dollar index rose 7% to 108.5), the price of gold continued to be supported by sustained healthy demand from global central banks and favorable safe-haven investment flows. The price of gold traded in a range of $1992 to $2788 per ounce over the past year, reaching a historical high at the end of October followed by a sell-off triggered by risk assets' bullish sentiment following the US election. The average gold price for the year was $2390 per ounce, a 23% increase year-over-year, marking the ninth consecutive year of gains. RBC predicts that the price of gold in 2025 will see positive but more moderate growth. With core drivers such as economic uncertainty, global economic growth, inflation risks, Federal Reserve prospects, concerns of a large US debt due to interest expenses, geopolitical tensions (deglobalization, localized armed conflicts, trade protectionism), and continuously high global sovereign debt levels remaining unchanged, RBC expects current major central banks and investors to strongly support gold demand. Previously, in November 2024, RBC Global Mining released a forecast for the average gold price in 2025 at $2823 per ounce, based on the RBC Elements gold price estimation model. Following this update, RBC stated that inflation and employment data prompted more hawkish comments from the Federal Reserve. RBC's model shows that a more conservative expectation of no rate cuts in 2025 and a risk of 10-year US Treasury yields rising to 5.0% could still lead to an annual gold price exceeding $2600 per ounce in 2025, aligning with current spot prices. Additionally, RBC noted that concerns about higher US Treasury yields are primarily based on expectations of worsening inflation risks, including US trade protectionism, changes in immigration policies, and continued high levels of budget deficits that could lead to defaults, all of which would benefit gold. In 2024, gold stocks underperformed compared to gold, with RBC attributing the weak performance of gold stocks to valuation pressures. Despite gold prices showing positive performance in 2024, gold stock benchmarks only grew weakly by 9%, falling far behind gold. RBC stated that the main reasons for this were valuation compression and challenges brought about by significantly higher-than-expected costs. Looking back to the beginning of 2024, RBC believed that the valuation of gold stocks was relatively reasonable, with the rise in gold prices being the main driver of stock increases. Now, RBC's analysis team believes that the valuation of gold stocks is attractive, with large gold producers trading at FCF/EV of about 7.0% based on spot gold trading, 4.9x EBITDA, and 1.0x P/NAV8%. RBC's analysis team believes that valuation factors and the increasing focus of mining companies in the sector on return on capital (ROC) present important potential opportunities for returns to be triggered, although sustained stock performance requires healthier operating profit margins and a reestablishment of gold price momentum. Additionally, the guidance season of the first quarter brings risks, as typical RBC senior producer and royalty stream estimates, compared to widely held consensus expectations, average at production -3% and AISC+4%. However, RBC's analysis team expects that inflation rates in 2025 will ease, with RBC's senior producer AISC+4% improving compared to the +9% in 2024 on a year-over-year basis.