Investor apprehensions, regarding the recovery of global economic growth and its consequent impact on stock markets, triggered by the coronavirus outbreak in China have increased the investment appeal of safe-haven assets. The demand for gold, considered as a key investment option during times of financial uncertainty, has also risen.
Per China’s official statement, the coronavirus has so far infected nearly 76,000 people and resulted in deaths of 2,200 people. South Korea has also reported first citizen death due to COVID-19. Further, Japan reported death of a pair of elderly passengers due to the dangerous virus.. Nearly, 20 countries have been infected with coronavirus.
Gold Price Skyrockets
On Feb 20, Wall Street tumbled as investors remained jittery regarding global economic recovery due to the spread of coronavirus. Consequently, market participants shifted their funds from risky assets like equities to safe-havens such as precious metal like gold, dollar-denominated funds and U.S. government bonds.
On Feb 20, future price of gold for April delivery surged $8.70 or 0.5%, to settle at $1,620.50 an ounce on Comex. That was the highest closing of most-active contract settlement since Feb 14, 2013. Notably, gold price breached the key psychological barrier of $1,600 and soared to $1,610.90 per ounce on Jan 8, following the escalation in U.S.-Iran geopolitical conflict. Following the event, the price of yellow metal declined but stayed above $1,550.
Momentum Likely to Continue
The present scenario of gold price soaring despite a surge in U.S. dollar index has left several economists and financial experts perplexed. On Feb 20, the U.S. Dollar Index (DXY), a gauge of the greenback against a basket of a half-dozen major currencies, gained 0.1% to settle at 99.831, its highest closing in three years.
Usually, a strong U.S. dollar weakens demand for other dollar-denominated bullions like gold. However, the northbound movement of both safe-haven assets is an indication about how the outbreak of coronavirus dented investor confidence.
Moreover, market participants are expecting major central banks to pursue easy monetary policies with the intention of injecting more liquidity into the system. Lower interest rates decrease the opportunity cost of holding non-yielding bullion, making gold cheaper for investors holding other currencies.
Buying pressure on gold is likely to remain firm with investors focusing precious metals as a store of wealth and hedge against market turmoil. Additionally, central banks are buying gold for rapid balance sheet expansion, resulting in a gold price rally.
Central Banks Pursuing Easy Monetary Policies
On Feb 20, the People’s Bank of China cut its benchmark one-year loan prime rate by 10 basis points, and the five-year loan prime rate by 5 basis points. This was in addition to the recent 10 basis points reduction of one-year mid-term lending rate by the Chinese central bank. Moreover, the government of China is taking several other monetary measures.
In the United States, the Fed has kept its benchmark lending rate intact while stating that coronavirus outbreak is a major near-term concern for the global economy. Per the CME FedWatch, majority of market participants are expecting one or more rate cut this year if coronavirus-led downturn continues beyond first-quarter 2020.
Our Top Picks
At this stage, it will be prudent to invest in gold stocks with strong growth potential. We have narrowed down our search to five such stocks. Each of these stocks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows the price performance of our five picks year to date.
Sibanye Gold Ltd. operates as a precious metals mining company in South Africa, the United States, Zimbabwe, Canada and Argentina. It produces gold, palladium, platinum, and rhodium and by-products, such as iridium, ruthenium, nickel, copper and chrome. The Zacks Rank #1 company has expected earnings growth of 1,075% for the current year. The Zacks Consensus Estimate for the current year has improved by 100% over the last 30 days. The stock price has rallied 27.2% year to date.
Equinox Gold Corp. (EQX - Free Report) is engaged in the acquisition, exploration and development of mineral deposits. It primarily explores for gold, copper and silver deposits. The Zacks Rank #2 company has expected earnings growth of 139.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 10.6% over the last 30 days. The stock price has jumped 23.3% year to date.
Kinross Gold Corp. (KGC - Free Report) is engaged in the acquisition, exploration, and development of gold properties in the United States, Russia, Brazil, Chile, Ghana and Mauritania. The Zacks Rank #2 company has expected earnings growth of 26.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.4% over the last 30 days. The stock price has climbed 18% year to date.
Alamos Gold Inc. (AGI - Free Report) is engaged in the acquisition, exploration, development and extraction of gold deposits in North America. It also explores for silver and precious metals. The Zacks Rank #2 company has expected earnings growth of 10% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.5% over the last 30 days. The stock price has appreciated 12.8% year to date.
Franco-Nevada Corp. (FNV - Free Report) is a gold focused royalty and stream company with additional interests in platinum group metals and other resource assets. The company has a Zacks Rank #2 and an expected earnings growth of 27.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 2.8% over the last 30 days. The stock price has surged 12.5% year to date.
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