Gold prices hit a three-month high on the last trading day of 2017, drawing curtains on its best yearly performance since 2010. Notably, spot gold was up more than 12% last year. The bullish momentum has continued in 2018 so far with gold currently trending above the psychological level of $1,300 an ounce. The rally has been fueled by a weaker dollar and renewed safe-haven buying prompted by heightened geopolitical tensions.
Weaker Dollar Aids Gold’s Cause
Gold is sensitive to dollar fluctuations. The dollar slumped almost 10% in 2017, marking its worst performance since 2003. Even though the dollar had started 2017 on a high, riding on hopes that President Trump would implement pro-growth and pro-inflation measures. However, concerns about Trump's ability to push through those policies started to weigh on the greenback soon.
Further, it lost steam as growth picked up outside the United States, with other countries' central banks moving toward tighter monetary policy, consequently narrowing the gap between the Federal Reserve and others. Moreover, tensions over North Korea and persistently low U.S. inflation led to the decline.
Dollar started 2018 on a weak footing with the dollar index hitting a three-month low. This was in tandem with a drop in US Treasury bond yields, which suggest markets are cooling expectations for higher interest rates in the United States in 2018.
While the Fed has stated that it will raise interest rates three times in 2018, the market is skeptical and anticipates raise less than three times. Furthermore, a matter of concern is that the leadership at the Federal Reserve is due to be replaced in 2018 and markets are unsure regarding the policies of the new team.
Continued Geopolitical Uncertainty is Fueling Prices
Last year, despite favorable equity markets, the yellow metal’s prices were fueled by its safe haven appeal owing to geopolitical tensions globally. Frequent terrorist attacks in UK and escalating tensions between the United States and North Korea propelled gold prices. In fact, the precious metal broke the threshold limit of $1,300 an ounce in 2017 triggered by the United States-North Korea imbroglio. With Kim Jong-un’s threat of “nuclear button” ready at his desk in his New Year’s speech, we believe this situation will continue to stoke safe haven buying for gold.
Another recent development that helped prop up gold prices is a series of protests in Iran, demanding an overthrow of the ruling government.
Rising Oil Prices to Support Gold
Rise in oil prices put upward pressure on inflation. This in turn enhances the appeal of gold as it acts as an inflation hedge. Last year, oil prices delivered a significant recovery. Posting its second annual gain in a row, the commodity closed 2017 up more than 12%. The U.S. oil benchmark ended the year at $60.42 per barrel, marking its highest closing since June 2015. The major catalyst was the Energy Department's inventory release, which revealed that crude stockpiles recorded another higher-than-expected weekly draw.
Moreover, a supply disruption in the North Sea, which is expected to trigger further reductions in global oil inventories, and the demonstrations in Iran are aiding the oil market. This is bullish for precious metals like gold.
Gold Industry Performance, Positioning
The Gold Mining industry has advanced 8.6% compared with the S&P 500’s growth of 11.6% in the past six months. 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 7.46, much lower than the S&P 500’s EV/EBITDA multiple of 11.86 The industry’s lower-than-market positioning calls for some more improvement in the near term.
The Zacks Industry Rank relies on the same estimate revisions methodology that drives the Zacks Rank for stocks. The way to look at the complete list of industries is we put our industries (all 265 of them) into two groups: the top half (i.e., industries with the best average Zacks Rank) and the bottom half (the industries with the worst average Zacks Rank).
In the last 10 years, using a one-week rebalance, the top half beat the bottom half by a factor of more than 2 to 1. Click here to know more: About Zacks Industry Rank
Within the Zacks Industry classification, the gold mining industry is grouped under the Basic Materials sector (one of 16 Zacks sectors). The gold mining industry currently occupies a space in the top half of the Zacks classified industries with a Rank of #57.
What Awaits in 2018?
Per the World Gold Council CEO Aram Shishmanian, there are plenty of reasons to be optimistic about gold’s performance in 2018. He noted “U.S interest rates may be rising but a lot is priced into the curve already and the direction of the dollar remains uncertain. Meanwhile, the long bull market in equities raises serious questions about prospects for stock prices.”
With chances of dollar depreciating further as investors remain skeptical whether U.S. tax cuts will stimulate economic growth or not, the yellow metal stands to gain from the scenario.
A number of new mines entered production in fourth-quarter 2017, which might support mine production till 2018. Noteworthy mines include The Natalka project in Russia, Canada’s Rainy River project and Houndé in Burkino Faso.
On the demand side, major markets, India and its neighbor China will continue to be growth drivers. Last year, the Indian market had suffered a setback due to the impact of imposition of Good and Service Tax (“GST”) and anti-money laundering legislation (“AML”) around jewelry retail transactions. We expect it to bounce back as the market adapts to GST.
Pent-up demand as well as festive buying is anticipated to boost demand for jewelry in the country. Moreover, government measures like mandatory hallmarking in 2018, will be a positive move for the industry. In China, retail demand remains high around the Chinese New Year.
Further, the United States continues to be a strong market driven by economic growth, improving employment levels and growth in consumer confidence. Elsewhere, Germany’s economy is expected to maintain momentum and unemployment is anticipated to continue declining, providing support for the world’s third-largest bar and coin market.
Demands from central banks also remain strong with Turkish and Russian central banks adding to their gold reserves. Further, gold is witnessing increased demand in technology, bolstered by demand for high-end smartphones after years of declines.
How to Play the Industry
To cash in on the favorable trends in the gold mining space, this is the right time to add a few stocks that have growth potential. Selecting the right growth stocks is not an easy job. Allow us to do the work for you.
With the help of our new Style Score System, we have shortlisted stocks that carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
To further narrow down the list, we have selected those which have Growth Score of A or B. Our research shows that stocks with Growth Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are the four stocks that fulfilled these criteria:
Canada-based Agnico Eagle Mines Ltd. AEM engages in the exploration, development, and production of mineral properties in Canada, Finland, and Mexico. The stock carries a Zacks Rank #2 and Growth Score of B. For 2018, the Zacks Consensus Estimate has moved north 2% in the past 60 days. The company has an average positive earnings surprise of 58.83% in the last four quarters. Its shares have gained 5% in a year.
Denver, CO-based Royal Gold, Inc. RGLD acquires and manages precious metal streams, royalties, and similar interests. The stock has a Zacks Rank #2 and Growth Score of B. For fiscal 2018, the Zacks Consensus Estimate has moved up 4% in the past 60 days and for fiscal 2018 the estimate has gone up 2%. The company has an average positive earnings surprise of 5.33% in the last four quarters. Royal Gold’s share price has rallied 24% in a year.
Canada-based Kirkland Lake Gold Ltd. KL engages in the exploration and development of gold properties. It has a Zacks Rank #2 and Growth Score of B. For 2018, the Zacks Consensus Estimate has moved up 4% in the past 60 days. Its shares have surged 52% in a year.
Golden Star Resources Ltd. GSS, a Canada-based gold mining and exploration company, has a Zacks Rank #1 and Growth Score of A. The company has an average positive earnings surprise history of 33.34% in the trailing four quarters. The Zacks Consensus Estimate for fiscal 2018 has moved up 21% over the past 60 days. Its shares have gained 12% in a year.
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