Back to top

Image: Bigstock

Gold: Safe Investment for the Long Haul

Read MoreHide Full Article

In the current unstable 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.

Increasing Wealth in Asia Will Continue to Fuel 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. 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. 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 Goods and Services Tax (GST). The market will bounce back as it adapts to GST. Pent-up demand as well as festive buying is anticipated to bolster demand for jewelry in the country. Moreover, government measures like mandatory hallmarking in 2018, is likely to be a positive for the industry. Demand 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

The United States delivered the strongest third quarter in the last five years, driven by economic growth, improving employment levels and growth in consumer confidence. Year to date, demand for jewelry has been up 4% to a seven-year high of 76.8 tons, consequently making the country the third largest jewelry market. Economic growth, improving employment levels and growth in consumer confidence will continue to sustain demand.

Demand in Technology Returns to Favor

Technology demand was pegged at 84.2 tons in the third quarter, 2% higher year over year and marked the fourth consecutive quarter of growth. In the first three quarters of 2017, demand reached 244.4 tons, up 2% over the same period of 2016, returning to growth after six years of decline.

Lately demand for gold is increasing in electronics, from bonding wire to LEDs and Printed Circuit Boards (PCBs). 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.

Research continues on finding new uses of gold in applications. Researchers in the United States and China have developed a gold-based catalyst that could improve the performance and efficiency of hydrogen-powered cars.

Revived Appetite for Acquisitions

Among other deals in the gold mining space, Alamos Gold Inc. (AGI - Free Report) and Richmont Mines Inc. entered into a agreement wherein the former will acquire all of the issued and outstanding shares of Richmont. With this, Alamos Gold has acquired a long-life, high-grade underground mine, Island Gold with growing production and first quartile cash costs in Ontario, Canada. Island Gold's near-term production growth complements Alamos Gold's existing peer-leading growth profile, while lowering the near and long-term cost profile of the combined company.

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. The yellow metal 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

Barrick Gold Corporation , Franco-Nevada Corporation (FNV - Free Report) and Sandstorm Gold (SAND - Free Report) carry a Zacks Rank #2 (Buy) and can be solid additions to your portfolio.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Barrick Gold has an expected earnings growth of 16.89% for 2018 and 11.01% for fiscal 2019. Franco-Nevada Corporation has an expected earnings growth of 6.81% for fiscal 2018 and 14.40% for fiscal 2019. Sandstorm Gold has an expected earnings growth of 90.91% for fiscal 2018 and 100% for fiscal 2019.

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.

Wall Street’s Next Amazon

Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.

Click for details >>

See More Zacks Research for These Tickers

Normally $25 each - click below to receive one report FREE:

Franco-Nevada Corporation (FNV) - free report >>

Sandstorm Gold Ltd (SAND) - free report >>

Alamos Gold Inc. (AGI) - free report >>