Broker Liberum has upped its long-term forecast of the gold price by 17% and picked Polymetal (LON:POLY), Centamin (LON:CEY) and Shanta Gold (LON:SHG) as the companies best placed to take advantage. Liberum’s new estimate for gold in 2016 is US$1,400/oz, equivalent to the average 3 yr trailing gold price. The prospect of the US Federal Reserve buying USS$40bn of agency mortgage backed securities per month “for a considerable period of time�, with real interest rates expected to remain “exceptionally low� beyond 2015 is an ultra-bullish gold scenario, says the broker. The gold price has also been underpinned at the US$1,650/oz level throughout the year, it says, by central banks seeking to diversify foreign exchange reserves as western monetary policy environment becomes ever more dovish. Liberum believes this ongoing support level for the gold price will hold at least until there is a sustained western economic recovery. On the supply side, it adds that global mine production is reaching a peak as quality ore bodies become harder to find without the advent of new innovative exploration and extraction techniques. "Grades are decreasing, producers are increasingly reliant on metallurgically challenging refractory ore reserves and operators are entering evermore challenging operating environments, both geopolitical and geographical. "As a result, 2012 has seen the major gold producers delay several world class but high capital cost projects as the industry starts to places greater emphasis on capital preservation, margin expansion and return to shareholders. "Gold equities have underperformed the gold price since decoupling began in late 2008. Over the last 12 months gold equities have floundered relative to the gold price on the back of near ubiquitous operational underperformance, market risk aversion and the flight to the relative safety of the gold ETF. "However the relative safety of an ETF ignores the potential for production growth and shareholder returns-driven outperformance. In this regard we expect our top picks Polymetal, Centamin and Shanta to outperform both gold ETF’s and the gold price on a 6-12 month basis." Russian group Polymetal offers the best value on both an earnings and EBITDA multiples basis and is in the strongest position to return cash to shareholders, the broker says. With the majority of expansionary capital already spent there is scope for a 50% increase in the payout ratio or special dividend by the year end says Liberum. Egypt-focused Centamin is seeing little impact on its operations from political tensions thus far, while a doubling of production capacity is on budget and schedule. Liberum expects surplus cash to start to be returned shareholders though cashflow will be impacted by profit sharing from the second half of 2013. Shanta Gold is the best growth bet in the small cap growth says the broker. It forecasts five year compound annual production growth of 68%. A ramp up to full production at the New Luika mine and resolution of working capital tightness should drive a re-rating on a 6 month view. Archipelago Resources (LON:AR.) is also on the cusp of outperformance and the next 3-6 months are expected to be transformational as management targets delivery of a material resource upgrade while demonstrating a track record for delivering operationally, argues Liberum.

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