Gold prices are currently trending above $1,500 an ounce — at levels last seen in 2013. The latest tit-for-tat tariffs by the United States and China in their year-long trade war, losses in stock market, decline in yield on the 10-year U.S. Treasury note to below 2% and a weaker dollar have collectively helped lift the yellow metal’s investment appeal.
Trade War Tensions Still Rife: A Positive for Gold
The US-China trade war has dramatically escalated in the past week. On Aug 23, China hiked tariff on U.S. goods worth $75 billion and announced it will raise import duties on U.S.-made autos and auto parts. In retaliation, President Trump tweeted that starting Oct 1, $250 billion of Chinese goods will be taxed at 30%, up from the prior 25%. Trump also raised the tariff on $300 billion of Chinese goods to 15% from 10%, effective Sep 1.
Consequently, investors’ hopes for progress on U.S.-China trade talks faded. Stock markets tumbled on apprehensions that elevated tariffs will add to global economic weakness. The Dow Jones Industrial Average declined 0.47% to close at 25,777.90. The S&P 500 fell 0.32% to close at 2869.16 and the Nasdaq Composite lost 0.34% to finish at 7826.95. The 10-year Treasury note yield slipped to 1.49% — its lowest since July 2016. This caused the dollar index, which measures the greenback's value against a basket of six major currencies, to slide.
Sales of new U.S homes witnessed a drop of 12.8% to 635,000 new homes in July from June’s revised rate of 728,000 and projected figure of 647,000 units. So far this year, new home sales have risen just 4.1%, reflecting ongoing weakness in the housing market despite the reduction in mortgage rates.
All these developments led to a renewed surge in gold prices, which had been enjoying a bullish run so far this year. Gold prices have been up 19.4% so far this year on account of a dovish Fed, doubts about the economic outlook and trade war.
Gold Industry Performance
The Gold Mining industry has rallied 54.9% so far this year compared with the S&P 500’s growth of 13.0%. Going by the forward 12 months EV/EBITDA multiple (a preferred valuation metric for mining companies that have high capital expenditures), the gold mining industry has a multiple of 8.0, much lower than the S&P 500’s multiple of 11.3.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bright prospects in the near term. The Zacks Mining- Gold Industry, which is a 33-stock group within the broader Zacks Basic Materials Sector, currently carries a Zacks Industry Rank #7, which places it at the top 3% of 256 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The combination of lower mined gold supply and higher demand, and geopolitical tensions could eventually drive prices north, which bodes well for gold-miners. Moreover, anticipation for rate cuts work in gold’s favor. Lower the interest rates, the lesser will be the opportunity cost of holding non-yielding bullion, making gold attractive for investors holding other currencies.
We suggest four gold-mining stocks carrying a Zacks Rank of #1 (Strong Buy) or 2 (Buy) that investors can take a look at. You can see the complete list of today’s Zacks #1 Rank stocks here.
Agnico Eagle Mines Limited AEM: This Toronto, Canada-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings per share for fiscal 2019 suggests year-over-year growth of 157.14%. The estimate moved up 57% over the past 90 days. The company has a long-term estimated earnings growth rate of 1%. The company has an average positive earnings surprise history of 266.67%. Shares of this company have gone up 58.6% year to date.
Franco-Nevada Corporation FNV: The Zacks Consensus Estimate for earnings for this Toronto, Canada-based company indicates year-over-year improvement of 34.19%. Further, the estimate has moved improved 20% over the past 90 days. The company has an average positive earnings surprise history of 9.63% over the trailing four quarters. The company has a long-term estimated earnings growth rate of 4%. Shares of this Zacks Ranked #1 stock has gone up 40.1% year to date.
Barrick Gold Corporation GOLD: This Toronto, Canada-based company carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings for fiscal 2019 suggests year-over-year growth of 54.29%. The estimate has gone up 38% over the past 90 days. The company has an average positive earnings surprise of 8.33% over the trailing four quarters. The company has a long-term estimated earnings growth rate of 2.00%. Year to date, the company’s shares have appreciated 46%.
B2Gold Corp. BTG: This Vancouver, Canada-based company carries a Zacks Rank #2. The company has expected earnings growth of 25% for the current year. The Zacks Consensus Estimate for the current year has improved 25% over the last 90 days. The company has an average positive earnings surprise of 4.17% over the trailing four quarters. The stock has surged 27.7% so far this year.
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