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Gold Prices Drop to 6-Month Low: Potential Winners & Losers

Madhurima Das
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Gold prices declined to six-month low owing to a stronger U.S. dollar. The spot gold price is currently pegged at $1,252.39 — levels last seen in December 2017. Over the past six months, gold prices have plunged around 4%. Meanwhile, dollar is heading for its strongest quarter since late 2016. A rise in dollar is making dollar-priced gold costlier for non-U.S. investors.


The ongoing imbroglio between the United States and China has resulted in escalation and ebbing of trade war fears, eventually leading to a seesaw in gold prices so far this year. Strength in U.S. dollar, rising U.S. Treasury yields, robust retail sales and manufacturing data have been weighing on gold price.


Further, the Federal Reserve has hiked interest rate by 25 basis points to a range of 1.75-2.00% and signaled two more hikes this year. Higher U.S. interest rates make gold a less attractive investment since it does not bear interest.


Gold Hasn’t Lost Its Sheen


Geopolitical Issues to be Catalysts: The ongoing trade conflict between United States and China is showing no signs of abatement. Increasing geopolitical tensions will support gold prices as it is sought as a store of value in these times.


Production Expected to Rise in 2018: A number of new mines entered production in fourth-quarter 2017, which is likely to support mine production till 2018.


India, China to Help Sustain Demand: Major markets, India and 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.


Further, the second half of the year is seasonally strong for the country due to the festive and wedding season buying. Moreover, the United States continues to be a strong market driven by economic growth, improving employment levels and growth in consumer confidence.


Lower Costs for miners: Over the past few years, gold miners have cut costs, checked capital expenditures, improved recovery efficiency within existing mines, paid down debt, eliminated non-core assets and focused on their highest ore-grade assets. These endeavors have helped lower the all-in sustaining costs for miners. Consequently, most gold mining stocks could be profitable even if spot gold prices were significantly lower.


Valuation is Inexpensive: The Zacks Mining – Gold Industry, which falls within the broader Zacks Basic Materials Sector, has underperformed both the S&P 500 and its own sector over the past six months. While the industry has declined 8.1%, the Zacks Basic Material Sector dropped 5.2% and the Zacks S&P 500 Composite gained 2.1%.


Mining - Gold Industry Performance Versus S&P 500 and Basic Materials Sector



However, the valuation looks really cheap now. One might get a good sense of the industry’s relative valuation by looking at its Enterprise Value to Earnings before Interest Depreciation and Amortization (EV/EBITDA). This valuation is a good measure for the industry’s given its complicated and capital-intensive nature.


The industry currently has a trailing 12-month EV/EBITDA ratio of 8.3, which looks inexpensive when compared with the market at large, as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.5. A comparison of the group’s EV/EBITDA ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Basic Material Sector’s trailing 12-month EV/EBITDA ratio of 10.3 is way above the Zacks Mining – Gold Industry’s EV/EBITDA ratio of 8.3.


We have handpicked a few gold stocks that are good buys right now, backed by a strong Zacks Rank and upward estimate revisions.


Alio Gold Inc. ALO: This Vancover, Canada-based gold miner carries a Zacks Rank #2 (Buy). The Zacks Consensus Estimate for the current-year EPS has been revised upward by 3% over the last 60 days. The company has delivered a positive average earnings surprise of 116.7% over the trailing four months. The Zacks Consensus Estimate for fiscal 2018 is pegged at 31 cents, reflecting a year-over-year rise of 3%. 


You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Kirkland Lake Gold Ltd. KL: The Zacks Consensus Estimate for this Toronto, Canada-based gold miner for the current-year EPS has been revised upward by 1% over the last 60 days. The Zacks Consensus Estimate for fiscal 2018 depicts year-over-year growth of 56%. The stock carries a Zacks Rank #2. The company has delivered a positive average earnings surprise of 4.7% over the trailing four months


Northern Dynasty Minerals, Ltd. NAK: This Vancouver, Canada-based acquires, explores for, and develops mineral properties in the United States. The Zacks Consensus Estimate for fiscal 2018 for this Zacks Rank #2 stock has narrowed to a loss of 12 cents per share from the prior estimate of 18 cents per share, over the past 60 days. It is also an improvement over the prior-year loss of 17 cents per share.


However, we suggest investors steer clear of stocks such as AngloGold Ashanti Limited AU and New Gold Inc. NGD. These stocks carry a Zacks Rank #5 (Strong Sell) and have been witnessing negative revisions in their earnings estimates lately.


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AngloGold Ashanti Limited (AU) : Free Stock Analysis Report
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