The gold market is approaching a “sweet spot” as macro and micro fundamentals align, said BMO Capital Markets, adding that investors should be paying attention.

“Macroeconomic, company fundamentals and valuation all point toward an opportunity for investors to benefit from increased exposure to precious metal equities,” analysts at BMO said in a report published on Tuesday. “A return to higher gold and silver prices may just be the catalyst needed to reinvigorate investor interest.”

BMO has upwardly revised this year’s gold price outlook by 4% to $1,327 an ounce, highlighting inflation and the yellow metal’s resiliency to rising U.S. dollar.

“In metals, when people think of inflation, gold immediately comes to mind,” analysts said. “The current rising inflation environment brings with it our expectations of a more rapid rate hike cycle, though in future years we still do project one of the slowest tightening cycles in U.S. economic history while monetary policy ex-U.S. looks set to remain loose.”









One of the drivers supporting gold this year will be physical demand for the precious metal, according to the report.

“Over recent years, with the notable exception of 2013, gold has benefitted from macro asset allocation, with inflows into physically backed ETFs. In contrast, physical gold demand has struggled for support in micro asset allocation, in other words, retail buying, being hindered by Indian import restrictions over the last couple of years.”

BMO projects a recovery in physical demand to be driven by the current inflationary environment and rising trade tensions.

“We expect a return of retail buyers where the need to increase allocation to gold as a hedge is rising once more. There are risks to this thesis including a decline in macros asset allocation on the back of a rising U.S. dollar, and potential alternative investment areas for the emerging market consumer, of which cryptocurrency is the latest,” analysts noted.









Important to highlight that gold prices have been “surprisingly resilient” in light of rising U.S. dollar and higher real U.S. rates, the report said.



“Gold has found support from rising geopolitical risk along with increasing concerns that the current U.S. expansion is soon nearing an end. Gold typically does well at the early stages of an inflation cycle, which does tend to come just after the peak rate of expansion,” analysts added.

As the micro asset allocation recovers, BMO estimates for the macro asset allocators interested in gold to retain strength.

“We expect geopolitical risk and growing concerns of surrounding the U.S. economy to keep macro asset allocators interested in gold. This still leaves a potential sweet spot where macro and micro are for once aligned on the positive side for gold,” BMO said.

Analysts also see a good opportunity in gold equities, noting that the precious equity market is currently trading at trough valuations and represents a compelling investment opportunity.

“Many gold equities have made material improvements to the point where they are beginning to compete with other industrial and material sectors,” BMO analysts wrote.

Five companies that stand out for BMO are Agnico Eagle, Fresnillo, Endeavour Mining, IAMGOLD, and Kirkland Lake.

“Restructuring over the last three years has improved profitability and a cultural shift to better business practices have positioned the precious metal miners to be increasingly competitive with industrial and materials sectors,” the report pointed out.

BMO estimates for the gold sector to move into a net cash position as soon as 2020.

“Given the cyclical nature of commodity prices, it is understandable that investors were un-nerved by high levels of debt when gold prices began declining in early 2013. Management teams within the gold sector have become much more focused on balance sheet strength and it is beginning to show this,” analysts said.

By Anna Golubova -



