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Market Update

Our Long-Term $1,100 Gold Price Forecast Unchanged

We don't expect recent gold price movements to have a massive impact on our gold miner fair value estimates.

With gold prices in a seeming free fall over the past few trading days, we want to remind our clients that our gold miner valuations have incorporated a long-term gold price assumption of $1,100 (in real terms) since April 2011. We base our long-term forecast on a look at the marginal cost of production. Our gold price view also incorporates our belief that central bank buying of gold can't continue interminably. For a summary of our arguments, please see our April 20, 2011, article, "We See Gold Going Lower in the Long Term" and our Feb. 22, 2012, article, "Are Central Banks Moving the Gold Market?"

We do not see a need to change our long-term gold price forecast. As we use discounted cash flow models to value our gold miners, and the bulk of a company's valuation stems from the cash flows we expect it to generate over the long term, we don't expect recent gold price movements to have a massive impact on our gold miner fair value estimates. However, our forecasts incorporate COMEX futures prices to project cash flows in years 2013-15 of our models. To the extent that lower near-term prices hurt near-term cash flows, our fair value estimates may fall as we update our models. Higher-cost miners' valuations are more likely to suffer in this environment. Further, as expectations for near-term operating cash flows fall, we may see gold miners defer or shelve expansion projects in order to preserve free cash flows. Dividend cuts may also be on the horizon, as dividend payouts had been ratcheted up aggressively as gold prices climbed.

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