Indonesia Gold sector: Brexit boost
- Safe-haven status = Gold volumes to highest levels since April
Gold’s function as a safe haven asset amid increased uncertainties has recently re-emerged following the UK’s decision to leave the EU, allowing gold prices to rise to USD1,323/toz, up 9% from its ytd average, with trading volumes up to 574,241 toz in June 2016, way above ytd average of 44,245 toz (exhibit 4). Note that in 1Q16, gold price had already closed at USD1,233/toz, up 17% q-q and was the best performing major asset class (exhibit 10), with gold demand having jumped 21% y-y to 1,289mt, the highest 1Q volume since 2013. This was supported by acceleration in gold investments (+122% y-y) despite slowing central bank buying (-3% y-y) and lack of jewellery demand (-19% y-y). Looking ahead, we expect gold demand to remain well supported due to Brexit.
- UK likely to increase proportion of its gold to total reserves
At this stage, our economist believes that GBP will have the lowest weighting in the IMF’s special drawing rights composition (SDR) post CNY having entered the list in October 2016 (exhibit 8), limiting UK’s ability to increase the country’s debt through quantitative easing (the IMF estimates UK’s 2015 net debt to GDP of 81%, US: 81%, Japan: 126%). Therefore, we expect the Bank of England (BoE) to increase its allocation to gold as a safeguard given increased uncertainties post Brexit. Currently, gold accounts for 9% of the UK’s total reserves. After comparing the UK’s gold holdings to its peers based on country’s total reserves (exhibit 6) we believe, the UK’s upcoming gold purchases could range from 318mt to 1,073mt if the UK were to decide to hedge current increasing uncertainty through higher gold reserves (exhibit 5).
Outlook: Revise 2016 gold price assumption to USD1,300/toz
Possibility of central banks deciding to increase gold purchases following the Brexit vote, coupled with improved outlook on India’s demand due to new tax structure and upcoming wedding season, suggests increasingly greater gold demand in 2016. Furthermore, China’s May gold imports jumped 68% m-m to its highest level in 2016 to 115mt, while India’s gold bar imports spiked 46% m-m to around 50mt. Based on aforementioned factors, we revise up our 2016 average gold price assumption from USD1,100/toz to USD1,300/toz (current: USD1,360/toz; ytd average: USD1,219), implying USD1,377/toz gold average price for the rest of 2016.
Recommendation: PSAB as our precious metal top-pick
Stock wise, PSAB is our top pick as the company is already in producing phase with expected gross margin expansion to 54% from 52% following gold price appreciation. On PSAB, we cut our earnings forecasts (exhibit 13) due to lower production volumes, but the stock remains a BUY, and we increase our DCF-based 12M TP to IDR413 (from IDR280) on better price outlook. We also reiterate BUY on gold exploration companies UNTR and MDKA on better gold price outlook. For ANTM, we raise our earnings forecasts on higher gold earnings contribution and expect additional 60mt gold refinery revenue derived from Freeport Indonesia’s anode slime project in Gresik starting 2018. As such, we upgrade ANTM to HOLD (from Reduce) with a new TP of IDR680 (from IDR207). Risk to our sector call is lower gold prices. $PSAB $UNTR $MDKA $ANTM