Bank of America Securities recently released a research report reiterating a positive outlook on gold against the backdrop of escalating Middle East tensions, stating that gold can serve as a safe-haven asset and inflation hedge during periods of geopolitical uncertainty. The bank also noted that a further escalation of tensions could tighten aluminum supplies, pushing prices higher. It initiated coverage on China Hongqiao with a "Buy" rating and a target price of HK$48. "Buy" ratings were also assigned to stocks including Zijin Mining Group International, Zijin Mining Group, and Aluminum Corporation of China.
Safe-haven demand and inflation hedging are expected to benefit gold. The report pointed out that since the sudden escalation of the Middle East situation last weekend, major oil and gas companies and traders have partially suspended shipments through the Strait of Hormuz. While the situation remains highly volatile and it's uncertain if the Strait will be further affected, the bank reaffirmed its positive view on gold, citing its historical role as a safe-haven asset and inflation hedge during times of geopolitical uncertainty.
Bank of America raised its gold price forecast last week. Although acknowledging increased uncertainty from potential leadership changes at the Federal Reserve, the bank sees a path for gold to reach $6,000 per ounce, supported by expectations of a weaker US dollar, geopolitical uncertainty, sustained investment demand, and central bank purchases. The bank forecasts gold prices will reach $4,900-$5,000 per ounce for 2026-2027.
The bank initiated coverage on Zijin Mining Group International as a top pick with a "Buy" rating and a HK$280 target price. This is based on the company's projected production growth of 29%/18% for 2026/2027, robust cost control, and a strong track record in mergers and acquisitions.
A "Buy" rating and HK$56 target were also assigned to Zijin Mining Group, as over 50% of its earnings come from the gold segment and its valuation is not high. "Buy" ratings were given to Shandong Gold and Zhaojin Mining Industry with target prices of HK$52 and HK$44, respectively.
Aluminum supply could tighten further if tensions escalate. The report noted that the Middle East is a major primary aluminum supply source for markets outside China. It further explained: 1) The Middle East has approximately 7 million tons per year of primary aluminum capacity, accounting for 9% of global supply. Gulf Cooperation Council members account for about 6.4 million tons/year, while Iran contributes about 660,000 tons/year. Iranian production could be constrained due to damaged power infrastructure. 2) GCC members export about 70% of their primary aluminum (approximately 4.2-4.4 million tons annually), with around 2 million tons exported to the US and Europe. A blockade of the Strait of Hormuz could sever exports of aluminum ingots. 3) The region's alumina capacity is only about 5 million tons/year, requiring significant imports. GCC imports of alumina are approximately 4.5-5 million tons in 2024, and these imports could also be disrupted. 4) Conflict provides cost support from both power and freight perspectives. Middle Eastern smelters rely on cheap local natural gas and oil. Soaring energy prices due to war would directly increase the marginal cost of global aluminum production. In contrast, China's greater reliance on coal for power generation offers a relative cost advantage.
Bank of America forecasts the Chinese aluminum price at 23,000 yuan per ton for 2026, with margins reaching a historical high of 6,000-7,000 yuan per ton. Reasons include: 1) Chinese aluminum capacity is near the 45 million ton cap. 2) Capacity expansion in Indonesia is slow due to power constraints. 3) Demand growth of 3% from power grids, energy storage systems, and electric vehicles. 4) A copper-to-aluminum price ratio above 4 times. 5) Beneficial power demand from AI.
The bank assigned a "Buy" rating to Aluminum Corporation of China with a target price of HK$17. It also gave China Hongqiao a "Buy" rating with a HK$48 target, noting potential catalysts for the stock price include: 1) Better-than-expected aluminum and alumina prices. 2) Stronger-than-expected aluminum demand from construction, power, and transportation sectors. 3) Chinese aluminum capacity hitting its ceiling. 4) More overseas capacity closures due to high costs. 5) Falling coal and power costs.