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 acts as a 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.
Asia Continues as a Catalyst
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 displayed relatively strong growth since the global financial crisis, despite persistently weak growth in the United States and Europe.
India’s gold industry suffered a setback last year due to the imposition of Goods and Services Tax (GST). The market is anticipated to bounce back as it adapts to GST. Moreover, government measures like mandatory hallmarking in 2018 is likely to be a positive for the industry. Pent-up demand as well as festive buying is expected to bolster demand for jewelry in the country.
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.
Further, the Indian government’s plans to formulate a comprehensive policy to develop gold as an asset class is likely to positively impact the gold industry. Moreover, the Union Budget includes policies designed to boost rural incomes, which is a major gold consumer. Demand will grow year over year, given the insatiable appetite for gold and the rising wealth of Indian consumers.
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.
Lately, it has been observed that 18-carat Gold and 3D hard gold jewelry continued to gain market share in China as consumers are increasingly tempted by the innovative, fashionable, non-traditional designs offered in these categories. The jewelry trade is now focusing more on branding and customer service. It is expecting a recovery in jewelry demand in 2018.
The expanding middle class in China and India, combined with broader economic growth, will have a significant impact on gold demand. In Asian economies, gold demand is generally closely correlated to increasing wealth and consequently will continue to sustain demand in the years to come.
Improving Employment Levels in U.S. Markets Hold Promise
The United States delivered the strongest first-quarter in the last nine years driven by economic growth, improving employment levels and growth in consumer confidence. Also, online sales continue to be robust, a trend that is expected to continue.
Innovation in Technology Boosts Demand for Gold
Technology demand was pegged at 82 tons in the first quarter of 2018, 4% higher year over year and marked the sixth consecutive quarter of growth.
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.
The wireless sector is driving major demand. It has become key area of growth as facial recognition is increasingly deployed in smartphones, gaming consoles and security systems. The 5G network upgrades currently in progress within the telecommunications industry will be a growth driver, going ahead. Verizon plans to roll out 5G to five cities in the United States. In fact, China, Japan, Taiwan and South Korea have similar plans.
Moreover, gold is finding use in the health sector as well, with researchers developing an artificial retina made of organic ink and gold while gold nanoparticles are being used to treat cancer and help diagnose other diseases.
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
Franco-Nevada Corp.’s (FNV) estimates for fiscal 2018 and for fiscal 2019 have gone up 4% and 1%, respectively. Franco-Nevada Corporation has an expected earnings growth of 13% for both fiscal 2018 and fiscal 2019. The company has an expected long-term earnings growth rate of 4%.
Sandstorm Gold Ltd.’s (SAND) estimates for fiscal 2018 and for fiscal 2019 have gone up 43% and 9%, respectively. The company has an expected earnings growth of 67% for fiscal 2018 and 20% for fiscal 2019.
The earnings estimates for IAMGOLD Corp. (IAG) have moved up 45% for fiscal 2018 and 24% for fiscal 2019. The Zacks Consensus Estimate for fiscal 2018 projects year-over-year growth of 167% and for fiscal 2019 reflects year-over-year growth of 28%.
Kinross Gold Corp. (KGC) has witnessed its estimates go up 16% for fiscal 2018 and 5% for fiscal 2019. The Zacks Consensus estimate for earnings for fiscal 2018 projects growth of 57.1%.
All these stocks carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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.
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