Gold prices are soaring above the $1,300 threshold for the first time in 2017, at same levels last witnessed in September last year. North Korea firing a ballistic missile over Japan sent the stock market in a tizzy and investors scurrying to safe haven asset like gold. Spot gold shot up 1% to trade around $1,322 an ounce in the immediate aftermath of the missile launch.
So far this year, the bullion has gained 14% aided by a weak dollar and geopolitical tensions. The dollar has been under strong selling pressure this year amid ongoing uncertainty over the economic agenda of U.S. President Donald Trump and mounting speculation on whether the Fed will implement a third rate hike this year.
Gold miners have also experienced a surge this year in tandem with gold prices. To name a few companies, IAMGOLD Corporation (IAG - Free Report
) , Seabridge Gold Inc. , Gold Fields Limited (GFI - Free Report
) Royal Gold, Inc. (RGLD - Free Report
) and Kinross Gold Corporation (KGC - Free Report
) witnessed price rise of 66.49%, 52.15%, 47.18%, 45.98% and 41.80%, respectively year to date.
Year to date, the overall gold mining industry
has outperformed the S&P 500. The industry has gained 15.3% in contrast with the S&P 500’s increase of 9.2%.
Valuation looks attractive for industry going by the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) multiple, a preferred valuation metric for cyclical industries. The industry has a trailing 12-month EV/EBITDA multiple of 7.36 lower than the S&P 500 EV/EBITDA multiple of 10.81. The industry’s lower-than-market positioning calls for some more upside moving ahead.
Let us delve deep in to the factors and find out what is fueling the rise in the bullion and consequently the industry, this year.
U.S.-North Korea Imbroglio
The relationship between the United States and North Korea has deteriorated significantly recently. Global investors have dumped stocks and flocked to safe haven assets as a result of the deteriorating ties. Earlier this month after President Trump warned North Korea would be met with "fire and fury" if the isolated nation continued to make threats against the United States. On Aug 29, North Korea stoked the fire further by launching a missile that passed over Hokkaido, the second largest island of Japan before crashing in the sea.
Japan’s Prime Minister Shinzo Abe stated that it was an unprecedented, serious and grave threat to Japan. Abe added that he will ask the United Nations to increase the pressure on North Korea. U.S. President Trump responded by saying 'all options on table’ when it comes to dealing with Pyongyang. This situation works in favor of gold which is considered a good store of value during volatility in other markets.
Jackson Hole Meeting Quells Hope of Interest Hike
The dollar index hit a new low for 2017 following Federal Reserve Chair Janet Yellen’s speech at the long awaited annual central banking conference in Jackson Hole, WY on Aug 25. The speech made no reference to U.S. monetary policy and was completely devoted to financial regulatory reforms. The lack of signals about the announcement of the next rate hike was interpreted as ‘dovish’ by the markets.
European Central Bank chief Mario Draghi stated that global economy was firming up. Draghi also noted that in Europe and Japan, the consolidation of the recovery is at an earlier stage compared with that of the United States. This led the euro surge to its highest since January 2015 against the U.S. dollar. Dollar weakness usually benefits gold, as it boosts the metal's appeal as an alternative asset and makes dollar-priced commodities cheaper for holders of other currencies.
Subdued U.S. Inflation Raises Cloud Over Rate Hike
The Fed had earlier indicated of three interest rate hikes in 2017, of which, two have already been made by the first half of 2017. In July, U.S. consumer prices rose 1.7% year over year, a bit improvement from 1.6% gain in June, but fell short of expectations of 1.8%. Inflation has continued to lag the Fed’s target of 2%. This estimate could lead a cautious Federal Reserve to delay raising interest rates until December.
Seasonal Demand in Asia Will Drive Prices
In the later part of this year, gold prices will get support from retail demand for the yellow metal, which is seasonally strong for India and China due to festival and wedding related buying activities. The World Gold Council anticipates demand from China to grow at least another 20% by 2017.
Through July 2017, imports more than doubled to 550 ton as customers built up inventories before the implementation of the Goods & Services Tax (GST). Though the imposition of GST poses a short-term challenge, a more transparent economy, expectations of bumper crop following a good monsoon will boost gold demand consequently. The World Gold Council anticipates consumers to buy between 650 tons and 750 tons of gold during the year.
Improved performance compared with the S&P 500, low valuation makes a good investment case for the gold mining industry. Backed by a solid Zacks Rank and healthy growth projections, Golden Star Resources Ltd. (GSS - Free Report
) and Randgold Resources Ltd. (GOLD - Free Report
) can be a solid addition to one’s portfolio.
Golden Star Resources has an expected earnings growth of 50% for fiscal 2017 and 183.33% for fiscal 2018. Randgold has a projected earnings growth of 26.31% for 2017 and 27.40% for 2018. Randgold’s estimates have also moved upwards in the past 30 days, depicting the optimistic outlook of analysts.
We suggest investors to add Alamos Gold Inc. (AGI - Free Report
) , Goldcorp Inc. (GG - Free Report
) , Kinross Gold and Newmont Mining Corp. (NEM - Free Report
) to their watch list. These stocks carry a Zacks Rank #3 (Hold) and their estimates have moved north recently.
Earnings estimate for Alamo Gold for fiscal 2017 has gone up 34.48% and for fiscal 2018 has moved up 9.09%. Earnings estimates for Goldcorp for fiscal 2017 and 2018 have gone up 6.29% and 2.39%. Kinross Gold’s estimates have gone up 30.61% for fiscal 2017 and 24.69% for fiscal 2018.
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