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Gold Mining Stock Outlook - February 2017

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Looking back at 2016, gold had an overall good year, with prices rising 8.5% to close 2016 at around $1,150 per ounce after three lackluster years. The start of the year had been stellar for gold as worries over the global economy, Brexit-induced volatile equity markets, followed by the Federal Reserve’s (Fed) stance to maintain steady interest rates and the introduction of negative interest rates by several central banks increased the safe haven appeal of gold and propped up gold prices.

In fact, gold prices surged 25% in the first half of 2016 – the strongest first half performance in 36 years. The yellow metal was the best performing asset, trumping major equity indices, investment grade and high yield bonds as well as commodity indices.

However, the momentum lost its sheen with gold prices losing its footing in the last two months of the year following President Trump’s win and the Fed’s rate hike. In fact, November was the worst month since Jun 2013 with the yellow metal losing 8% of its value. Prior to the election, gold prices had gained around 20% since the beginning of the year.

Gold demand rose 2% in 2016 to reach a 3 year high of 4,308.7 tons. Rising prices for major part of the year as well as regulatory and fiscal hurdles in India and China’s softening economy led to jewelry demand dropping to 7 year lows. On the contrary, demand for gold-backed ETFs peaked to its highest level since 2009 to 531.9 tons.

Concerns over the uncertainty of future interest rate hikes, the U.S election, negative interest rates and price momentum led to ETF inflows through October. However, Q4 saw outflows totaling 193.1 tons as the Nov elections removed a significant element of uncertainty among investors. Trump’s growth boosting plans also increased interest rate expectations and pushed the U.S dollar higher while gold prices moved south.

As per the latest report by the GFMS team at Thomson Reuters, gold supply continued to trickle down in fourth-quarter 2016. This made 2016 the first calendar year of a fall in mine output since 2008. In recent years, additional production from new mines brought on stream has waned. Cost management remains a key priority for the industry. This has helped costs come down well below the peak levels from 2013. Producers have cut down on expenditure and are hesitant to invest in new projects. Instead the producers are focused on maximizing production from their existing portfolio of assets.

Nevertheless, gold prices, have gained 6% so far in 2017. The market was jittery before Trump’s inauguration and consequently gold registered gains. Recently, gold was back above $1,200 an ounce owing to increased safe haven demand as U.S. President Trump‘s immigration ban shook global markets.

Sector Level Earnings Trend
As per the Zacks classification, the gold-mining industry comes under the broader Basic Materials sector. Taking into account all the companies that are yet to report in the sector, the sector’s earnings is projected to rise 3.9% in the fourth quarter. This follows a 4.7% increase in the third quarter and a marked improvement from the 11.6% decline witnessed in the second quarter and 15.7% in the first quarter of 2016.

Positive growth will continue in 2017, with first-quarter earnings expected to grow 7.7% followed by 4.9%, 6.2% and 21.1% in the second, third and fourth quarter, respectively. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)

Industry Ranking & Outlook – Neutral

We rank all of the more than 255 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available on the Zacks Industry Rank page. The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 255+ companies is that the outlook for the top one-third of the list (Zacks Industry Rank of #85 and lower) is positive, the middle one-third (between #86 and #170) is neutral while the outlook for the bottom one-third (Rank #171 and higher) is negative.
Currently, the gold mining industry is in the middle tier with a Zacks Industry Rank of #151, indicating a neutral outlook.

What’s in Store for 2017?
In the U.S., even though there are positive expectations about President Trump’s economic proposals, there are also concerns. The US dollar has gained ground since Trump’s victory but uncertainty is rife. Further, political risk is rising as Europe will hold key elections in the Netherlands, France and Germany in 2017. Additionally, Britain must negotiate its exit from the European Union. All this will trigger safe haven demand for gold.

An upward inflationary trend is likely support gold demand as it is seen as an inflation hedge. Higher inflation will keep real interest rates low, which in turn makes gold more attractive. Further, inflation makes bonds and other fixed income assets less appealing to long-term investors.

In Asia, gold demand will continue to be backed by retail demand for the metal, due to festival and wedding related buying activities in countries like India and China. Further, demand from the central bank will support prices as this sector has remained remarkably consistent.
While demand will remain strong, supply of this precious metal has already attained peak levels as per reports. Lower gold prices in the past few years had restricted the ability of gold producers to invest in new projects. There are few new projects and expansions expected to begin producing this year. Further, those in the near-term pipeline are generally fairly modest in scale.

Thus, global mine supply is set to continue its downward journey in 2017. Lower mined gold supply could eventually help prices navigate north.

How to Play the Industry

A positive outlook for the industry reinforced by expectations of earnings growth eventually in 2016 makes a good investment case for the gold mining industry. Investors can consider the following gold stocks that are backed by a solid Zacks Rank and estimate revisions.

With positive estimate revisions, positive record of earnings surprises in the recent quarters, and robust earnings growth projected for 2017, IAMGOLD Corp. (IAG - Free Report) , can be a solid addition to one’s portfolio. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Harmony Gold Mining Company Ltd. (HMY - Free Report) carries a Zacks Rank #2 (Buy) and its estimates for fiscal 2017 have moved up around 10% over the last 7 days. Further, for fiscal 2018 it has gone up 46%. The stock has an expected earnings growth of 253.33% for fiscal 2017.

AngloGold Ashanti Ltd. (AU - Free Report) , also carries a Zacks Rank #2 and has a projected earnings growth of 234% for 2016 and 47.90% for 2017.

However, we suggest staying away from or getting rid of Zacks Rank #5 (Strong Sell) stocks such as Goldcorp Inc. and Randgold Resources Ltd. (GOLD - Free Report) . These stocks have witnessed downward revision in their estimates and also have a negative record of earnings surprise history in recent quarters.