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Gold Drops on US-China Talk Prospects, Strong Jobs Data

Madhurima Das

Gold prices declined 2% to $35 an ounce on Sep 5 — the biggest drop in dollars since 2016. The news that China and the United States have agreed to hold high-level trade talks in Washington DC in early October, stronger-than-expected U.S. private sector employment data and momentum in the service sector were the primary reasons behind the slump.

This drove investors away from gold toward riskier assets. The Dow Jones Industrial Average gained 1.41% to close at 26,728.15 on Sep 5. The S&P 500 closed at 2,976.00, exhibiting growth of 1.30%. The Nasdaq Composite closed 1.75% higher at 8,116.83.

Positive Jobs Data, Service Sector Turn the Tables for Gold

Per ADP's report, 195,000 private sector jobs were added in August, up from the revised 142,000 in July and also came in ahead of the consensus. Further, per the Labor Department, initial claims for state unemployment benefits increased 1,000 to a seasonally adjusted 217,000 for the week ended Aug 31 — near the lowest level since 1969. Layoffs remained low despite the impact of the ongoing trade war, which has been weighing on business investment and manufacturing activity.

Gold prices were also impacted on positive date from the service sector. Per the Institute of Supply Management (ISM), the Non-Manufacturing Purchasing Managers Index was 56.4% in August, up from July’s 53.7% and higher than expectations. This represents continued growth in the non-manufacturing sector. New orders sub-index and the employment index was at 60.3% and 53.1%, respectively. Further, Hong Kong government’s decision to withdraw the extradition bill weighed on the safe-haven demand for the metal.

Despite this decline, the yellow metal has still managed to rake in an 18.5% gain so far this year. Uncertainty on the Brexit front and expectations of further rate cuts by the Fed will work in gold’s favor. Demand remains strong with India and China acting as the major drivers. Further, the last few months of the year are seasonally stronger in India due to wedding and festive seasons. The combination of lower mined gold supply and higher demand, and geopolitical tensions could eventually drive prices north, which bodes well for gold-miners.

Gold Industry Performance

The Gold Mining industry has rallied 55.8% so far this year compared with the S&P 500’s growth of 15.7%. 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 8.05, much lower than the S&P 500’s multiple of 11.64.

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 #9, which places it at the top 4% 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.

We suggest five 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.

Kirkland Lake Gold Ltd. KL: This Toronto, Canada-based company carries a Zacks Rank #1. The company has expected earnings growth of 69.85% for the current year and 13.85% for the next. The Zacks Consensus Estimate for the current year and for fiscal 2020 has moved up 12% and 14%, respectively, over the last 90 days. The company has an average positive earnings surprise of 6.07% over the trailing four quarters. The stock has surged 85% so far this year.

Franco-Nevada Corporation FNV: The Zacks Consensus Estimate for earnings for this Toronto, Canada-based company indicates year-over-year improvement of 34.19% for fiscal 2019. The estimate for fiscal 2020 suggests growth of 18.79% from the prior fiscal. Further, the estimate for fiscal 2019 and 2020 has improved 20% and 22%, respectively, 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% year to date.

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 and fiscal 2020 suggest year-over-year growth of 157.14% and 83.3%, respectively. The estimates for fiscal 2019 and 2020 have moved up 57% and 75%, respectively, 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 surged 52% 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 and fiscal 2020 suggest year-over-year growth of 54.29% and 31.22%, respectively. The estimate for fiscal 2019 and 2020 has gone up 38% and 54%, respectively, 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 8.33%. Year to date, the company’s shares have appreciated 36%.

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 and 74.38% for the next. The Zacks Consensus Estimate for fiscal 2019 and fiscal 2020 has improved 25% and 40%, respectively, 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 22.6% so far this year.

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