Ratings agency Moody’s has expanded its price sensitivity range for gold, based on supportive factors such as lower-for-longer interest rates and geopolitical uncertainties.
Moody’s has increased the higher end of the sensitivity range by $100/oz to $1 400/oz, while the lower end of the range remains at $1 100/oz.
This changes the midpoint to $1 250/oz from $1 200/oz and represents a 4% increase on previous expectations.
Since 2014, the average gold price has been $1 269/oz.
Moody’s price sensitivity ranges and the midpoint represent baseline approximations that the agency uses to evaluate risk when analysing credit conditions of companies within the sector.
“We periodically review, in light of changing global gross domestic product expectations, our base metals, iron-ore, metallurgical and thermal coal, gold and silver price ranges to better sensitise future financial metrics for companies,” the agency notes.
Moody’s explains that the increase to the upper end of its gold price range is the result of expectations that real interest rates across maturities will remain historically low over the next few years.
“Nominal ten-year government bond yields in advanced countries in particular, but also in emerging market countries, are now historically low. The current US ten-year treasury yield is about 1.8%, close to zero in real terms and, similarly, the yield on the ten-year German bund is unusually low at -0.30%.
“A number of countries including Japan, Germany, France, the Netherlands, Denmark, Sweden and Switzerland, have long-term sovereign nominal bond yields close to zero or in negative territory,” Moody’s says.
The World Gold Council’s ‘Outlook 2020’ report notes that 90% of developed market sovereign debt is trading at negative real interest rates, providing an offset to the no-yield disadvantage gold has against other safe haven investments.
The expanded range also incorporates Moody’s view that gold does not have the same supply-demand fundamentals as other metals, and is largely seen as a safe haven or store of value, fluctuating in response to global macroeconomic factors.
“As a result, market sentiment and speculative positioning will keep gold prices volatile. Moody’s macroeconomic board believes the risk of a flare-up in frictions between the US and China will persist, despite the temporary de-escalation of trade tensions between the two largest global economies following the US-China “phase one” agreement.
“Also, many tariff barriers remain globally, future negotiations will be difficult and political and geopolitical risks will continue to weigh on financial markets; all factors we expect will support gold prices as investors look for perceived safe assets in which to invest,” the agency explains.
The new expanded range alone will not result in rating upgrades because Moody’s does not rate to price. In a high commodity price environment, the agency expects credit metrics will be stronger in each rating category.
The expansion of the sensitivity range does, however, allow for greater flexibility to assess the financial profile of companies given the volatility in gold prices – particularly for the agency’s near-term views.
“We evaluate across price ranges to determine the resiliency of a company’s performance over a number of price points as our ratings need to be durable across a range of outcomes. We will use the new $1 250/oz midpoint in our peer and comparative analysis.
“Asset quality, specifically a gold miner's cost profile and its ability to maintain good profitability through a range of price scenarios, is a key rating factor with consideration on how companies use their cash flow also being important,” Moody’s says.