Gold prices closed at its lowest in nearly two months yesterday, dragged down by a stronger dollar and U.S. equities closing at record highs. The dollar has gained in recent weeks as investors grow more optimistic about the prospect of U.S. rate hikes and tax cuts that are likely to boost the U.S. economy. Further, with the North Korean conflict taking a back seat at the moment and strong numbers coming in from the United States, investors have a renewed appetite for riskier assets, which has dulled the demand for safe-haven gold.
Gold for December delivery on Comex fell 0.7%, to settle at $1,272.70 an ounce on Oct 2 — the lowest since Aug 8. The spot price for an ounce of gold is $1271.73, down 0.65% on the day. Despite a tough landing at September end, gold has notched 5% gain for the third quarter.
Indexes Start Q4 on a Strong Note
All three major indexes closed at record highs yesterday, kick starting the fourth quarter. The S&P 500 rose 0.4% to 2,529.12, particularly led by health care and financials while the Dow Jones industrial average gained 0.7% or 152.51 points to close at 22,557.60. The Nasdaq composite closed 20.76 points or 0.3% higher at 6,516.72. Not only big stocks, The Russell 2000, which tracks small-cap stocks gained 1.3% to a record close of 1,509.47.
The U.S. Manufacturing Sector Remains Strong
The primary gauge of manufacturing activity, ISM Manufacturing PMI accelerated to 60.8 in September, from 58.8 reading in August. It not only beat market expectations of 58 but was the indicator’s highest level since May 2004, bolstered by a rise in new orders, production and employment. The strong reading has sent gold prices lower.
Prospects of a Rate Hike
Consumer spending inched up 0.1% in August, as Hurricane Harvey weighed on car sales. Adjusted for inflation, spending fell for the first time since January. Personal income climbed to 0.2%, above the expectation of 0.1%. Inflation remains stubbornly low and the PCE index, increased 0.1% in August. The core personal consumption expenditures price index is the Fed’s preferred inflation measure and has a target of 2%.
However, this did little to alter expectations that the U.S. Federal Reserve would raise interest rates in December. Yellen indicated earlier in the week that the central bank was sticking to plans for a third rate hike this year and three in 2018 despite uncertainty about the path of inflation. Gold is highly sensitive to rising rates, which lifts the opportunity cost of holding non-yielding assets such as bullion, while boosting the dollar, in which it is priced.
Much Hopes Pinned on India
With China entering a week-long holiday encompassing both the National Day holiday and the Mid-Autumn Festival, trade is anticipated to decline. Much hope is pinned on India to support demand. The last quarter of the year is seasonally strong for gold in India, with the upcoming Diwali festival and wedding season.
Improved Price Performance, Attractive Valuation
In the past three months, the Zacks Gold Mining industry has gained 8.3%, outperforming the S&P 500’s advance of 3.8%.
Going by the EV/EBITDA multiple (a preferred valuation metric for mining companies that have high capital expenditures), the gold mining industry has a trailing 12-month EV/EBITDA multiple of 7.22, lower than the S&P 500 EV/EBITDA multiple of 11.36. The industry’s lower-than-market positioning calls for some more upside moving ahead.
The dip notwithstanding, price of the yellow metal is up roughly 11% year to date. Gold has benefited this year on the back of frequent terrorist attacks in U.K. and escalating tensions between the United States and North Korea. Further, uncertainty over the economic agenda of President Trump continued to fuel the rise.
A hawkish shift in Fed policy expectations, upbeat economic data, and optimism about tax reform will weigh on gold prices in the months ahead. However, geopolitical tensions, terrorist attacks might fuel safe haven demand and prop up gold prices.
Gold prices will be aided by retail demand in India. Another factor that will eventually be a tailwind for gold is the dwindling supply of the precious metal. The combination of lower mined gold supply and higher demand could eventually propel the prices north.
We have, consequently, highlighted a few gold stocks that are good buys right now, backed by a strong Zacks Rank and upward estimate revisions.
Acacia Mining plc (ABGLF - Free Report) , together with its subsidiaries, mines, processes and sells gold in Africa. The company also produces co-products, such as copper and silver.
The stock carries a Zacks Rank #2 (Buy). For 2017, the Zacks Consensus Estimate has moved north 12% in the past 90 days. The company has an average positive earnings surprise of 20% in the last four quarters.
Agnico Eagle Mines Limited (AEM - Free Report) is a Canadian-based gold producer with operations in Canada, Finland and Mexico, along with exploration and development activities in Canada, Finland, Mexico and the United States. The stock carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
For 2017, the Zacks Consensus Estimate has moved north 11% in the past 90 days. The company has an average positive earnings surprise of 52.94% in the last four quarters.
Randgold Resources Limited (GOLD - Free Report) is an international gold mining and exploration business. It carries a Zacks Rank #2. For 2017, the Zacks Consensus Estimate has moved north 8% in the past 90 days.
Kinross Gold Corporation (KGC - Free Report) , together with its subsidiaries, engages in the acquisition, exploration, and development of gold properties. The company’s gold production and exploration activities are carried out principally in Canada, the United States, the Russian Federation, Brazil, Chile, Ghana, and Mauritania. The stock carries a Zacks Rank #2. For 2017, the Zacks Consensus Estimate has moved up 43% in the past 90 days. The company has an average positive earnings surprise of 16.7% in the last four quarters.
Kirkland Lake Gold Ltd. (KL - Free Report) engages in the exploration and development of gold properties. The company owns and operates five underground gold mines, including the Macassa mine, the Holt mine, and the Taylor mine in Ontario, Canada; and the Fosterville Mine in Victoria and the Cosmo Mine in Northern Territory, Australia, as well as four milling facilities in Canada and Australia. It carries a Zacks Rank #2. For 2017, the Zacks Consensus Estimate has moved up 21% in the past 60 days.
Sandstorm Gold Ltd. (SAND - Free Report) is a resource-based company, focusing on acquiring gold and other metal purchase agreements as well as royalties from companies that have advanced stage development projects or operating mines. The stock carries a Zacks Rank #2. For 2017, the Zacks Consensus Estimate has moved up 33% in the past 60 days. The company has an average positive earnings surprise of 50% in the last four quarters.
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