In the current volatile financial climate, the need to reduce one’s susceptibility against changing economic fortunes has become a top priority for investors. This is where the safe-haven appeal of gold becomes alluring and often becomes the cushion to fall back on. In contrast to more volatile stock market investments, gold has always been valued as a solid and dependable means to protect wealth.
There are plenty of reasons to be optimistic about the gold mining industry for both the short and long term. Below, we have discussed what investors in the gold mining sector can look forward to in the coming months and years.
Affluent Asia Will Continue to Drive Demand
In the last decade, combined demand for gold from India and China has soared 71%. These two markets roughly account for 54% of consumer gold demand, up from 33% in 2005. This figure is expected to go up to 60% in 2017. Asia is now less economically dependent on the West and has shown relatively strong growth since the global financial crisis, despite persistently weak growth in the United States and Europe.
India has a strong tradition of investing in gold, primarily in jewelry. Demand mostly increases around the wedding and festive seasons, which begin from mid-to-late August and continue until January. Expenditure on gold can account for almost 30% of the total wedding cost. This gives a boost to local currency demand and raises gold prices.
In China, people view gold, whether in the form of bars, coins or jewelry, as a natural medium for savings and diversification. Gold is embedded in China’s culture, and the Chinese New Year and weddings are key events for the country’s gold consumption. The World Gold Council anticipates demand from China to grow at least another 20% by 2017.
While China’s middle class is expanding, India has a comparatively low level of per capita gold holdings. The powerful combination of increasing urbanization and strong cultural affinity for gold bodes well for the metal’s demand in both these countries.
India’s gold industry suffered a setback last year due to the imposition of excise duty that prompted a strike in the early part of the year and the demonetization initiative in the fourth quarter that caused a liquidity squeeze that affected the entire economy. However, this year the Indian industry has returned to a growth trajectory. More transparent economy, expectations of bumper crops following a good monsoon will boost gold demand.
The imposition of Goods and Service Tax nonetheless poses a short-term challenge to household gold buying. Overall, the World Gold Council anticipates consumers to buy between 650 tons and 750 tons of gold during the year. This will grow year over year, given the insatiable appetite for gold and the rising wealth of Indian consumers.
Overall, macroeconomic trends in Asia will support economic growth in the coming years. In Asian economies, gold demand is generally closely correlated to increasing wealth and consequently will continue to sustain demand in the years to come.
U.S Markets Hold Promise
Demand for gold jewelry in the first half of 2017 in the United States was at 49.9 tons — the strongest first-half total since 2009 due to the post-election lift in U.S. consumer sentiment. Economic growth, improving employment levels and growth in consumer confidence will continue to support demand.
Increasing Demand in Technology
Lately demand for gold is increasing in electronics, from bonding wire to LEDs and Printed Circuit Boards (PCBs). Supply conditions will remain constrained through 2017, further exacerbated by the expected launch of new generation smartphones in the latter part of the year. LED demand continues to recover, showing improvement in the automotive sector, where LEDs are used extensively in sensor technology.
New features, such as collision avoidance and intelligent sensing, depend on state-of-the-art sensor chips containing gold. Further, industry upgrade to Organic LED lighting given its versatility and energy saving benefits will boost gold demand and could help offset the switch to gold-free Chip Scale Packaging (CSP) seen in the sector.
PCBs, which enjoyed positive spill-over benefits from strong smartphone shipments, continued to benefit from increasingly widespread adoption of wireless charging. The wireless sector remained strong on demand from leading smartphone manufacturers for new models scheduled for release in the second half.
Research continues on finding new uses of gold in applications. In the second quarter, there was a spurt of patent applications across a broad range of sectors. For instance, two faced spherical particles, where one face is made of gold layers topped by silver nanoparticles, have been designed to trap bacteria in contaminated water and transform it into clean and safe drinking water. Moreover, as, material coated with gold nanoparticles can aid in improving conversion of sunlight into clean energy, per another research finding.
Revived Appetite for Acquisitions
Goldcorp Inc. (GG - Free Report) and Barrick Gold Corp. (ABX - Free Report) closed the previously announced agreement to consolidate Caspiche and Cerro Casale gold projects in a 50-50 joint venture (JV). The deal will enable both companies to leverage potential synergies within the Maricunga Gold Belt, based in Atacama Region in northern Chile. Following the completion of Goldcorp’s acquisition of Exeter Resource Corp., the JV will control more than 20,000 hectares of land in the Maricunga District, including the Caspiche and Cerro Casale deposits.
The JV has the potential to consolidate infrastructure capabilities and provide synergies in the form of reduced capital and operational costs. It will also reduce the environmental footprint of the company and increase returns. Both Barrick and Goldcorp will be able to combine financial and technical capabilities with these projects, along with increasing net asset value per share and delivering value to shareholders and partners.
White Gold Corp. has completed the acquisition of entities holding the White Gold, Black Fox, JP Ross, Yellow and Battle properties from Kinross Gold Corp. (KGC - Free Report) . The acquisition will consolidate and expand White Gold’s already substantial land position to approximately 40% of the White Gold District. It addsapproximately one million ounces of gold grading between 2.7 to 3.19 g/t gold on the Golden Saddle area.
Canada’s Kirkland Lake Gold (KL - Free Report) has bought Newmarket Gold Inc. in a bid to create a new mid-tier gold company with a market capitalization of C$2.4 billion ($1.83 billion) with the capability to produce over 500,000 ounces of gold annually.
Gold’s Safe Haven Appeal
Gold has always been viewed as a metal of great value and a safe-haven asset. The buying of gold is a hedge against inflation, macroeconomic, geopolitical, systemic and monetary risk. This trend intensifies during periods of economic turmoil and geopolitical tensions. The current economic scenario is rife with all these factors.
Superiority Over Other Precious Metals
Gold’s worldwide acceptance as a medium of value sets it apart from other precious metals such as platinum, palladium and silver whose demand stems mainly from industrial applications. Gold is produced primarily for accumulation while the other commodities are produced for consumption.
Moreover, in contrast to other commodities, gold does not perish, tarnish or corrode, nor does it have quality grades. There has not been any material change in gold’s quality over the years; gold mined thousands of years ago is the same as today. Gold existing above ground is easily interchanged with newly mined gold. This ensures the continuous demand of the metal for years to come.
Some Good Picks from the Industry
Golden Star Resources Ltd. (GSS - Free Report) , Randgold Resources Ltd. (GOLD - Free Report) , Kinross Gold Corp. and Kirkland Lake Gold can be solid additions to one’s portfolio. Golden Star Resources has an expected earnings growth of 50% for fiscal 2017 and 183.33% for fiscal 2018. The stock currently sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Randgold Resources carries a Zacks Rank #2 (Buy) and has an expected earnings growth of 26% for fiscal 2017 and 27% for fiscal 2018. Kinross Gold, another Zacks Rank #2 stock, has an expected earnings growth of 14% for fiscal 2017 and 59% for fiscal 2018. Kirkland Lake Gold has an expected earnings growth of 24% for fiscal 2017 and 95% for fiscal 2018. The stock carries a Zacks Rank #2.
Check out our latest Gold Mining Outlook for more on the current state of affairs in this market from an earnings perspective, and how the trend is shaping up for this sector going forward.
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