Goldman Sachs turns positive on gold, highlights best gold miners

Goldman Sachs' commodities analysts have turned positive on gold for the first time in five year, as the yellow metal's dislocation from US interest rates "is here to stay".

FTSE 100-listed Fresnillo was upgraded to 'buy' and added to Goldman's 'conviction list' with a 1,550p price target due to its strong growth pipeline, potential to grow dividends, and attractive valuation versus history.

Egypt-focused Centamin, which is seen as having the best asset in terms of quality and cost positioning, upside risk to 2017 production and potential for strong balance sheet and dividend growth, was also a top-pick 'buy' on the conviction list.

Analysts also raised Randgold Resources to 'buy' but cut the TP to 7,500p from 8,000p, with the recent sell-off presenting attractive entry point, but DR Congo risks noted.

Goldman said the commodities team's positive position on gold might seem counter-intuitive as the bank's economists have a positive view on global growth, which might be expected to weigh on the gold price.

However, the commodities team believes that the dislocation between the gold prices and US rates is here to stay: "Their bullish view on gold is driven by: 1) Higher inflation (gold is an inflation hedge); 2) Rising EM wealth which historically has been positive for gold; and 3) Increased risk of an equity correction."

While Goldman forecasts four Fed rate hikes this year, the commodities analysts pointed to empirical data from the past six tightening cycles shows gold has outperformed post rate hikes four times.

"This is likely a function of investors waiting on the sidelines and then becoming interested in gold once the tightening 'catalyst' has passed."

Not all gold mining companies are equal, however, as rising inflation and capex could compress margins and free cash flow, so Goldman's commodities equity analysts prefer companies that can grow production while increasing returns.

"Historically, when gold prices have rallied the more levered names have outperformed. However, we believe we are in an environment where companies that can spend capex to grow while growing returns will be rewarded more by the investors vs. those burning FCF."

Polymetal was also a 'buy' due to its high-quality assets, cost leadership, FCF growth and attractive valuation after recent underperformance.