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Gold Prices Rise 5% YTD: Will India Help Sustain the Rally?

Madhurima Das

Gold prices have gone up 4.9% so far this year and are currently at levels last seen in February 2019 as the dollar lost ground following weak U.S jobs data. Total nonfarm payroll employment expanded by just 75,000 in May much lower than the consensus of 185,000. Further, per payroll processor ADP’s latest employment report, U.S private employers hired 27,000 people in May 2019 — marking the lowest growth in more than nine years. The figure fell way short of consensus forecast of job growth of 185,000. In April, private-sector employment increased by 275,000.

Recently, the Trump administration announced that it will impose a tariff of 5% on all imported goods from Mexico beginning Jun 10 and plans to gradually increase that tax to 25% until the illegal immigration stops. The intensifying tensions between the United States’ and some of its largest trading partners triggered safe haven demand for gold and raised prices. However, gold prices suffered a temporary setback owing to an agreement between the United States and Mexico to avert a tariff war. Nevertheless, ongoing speculations that the Federal Reserve will cut interest rates this year continue to support gold prices.

India Holds Promise

Per reports, India's gold imports in May jumped 49% year over year to 116 tons as lower prices during a key festival bolstered retail demand. In value terms, the country's gold imports rose to $4.78 billion in May from $3.48 billion a year ago. Higher gold imports by India — the world's second-biggest consumer of the yellow metal — could support global prices further. Notably, India sources nearly all of its gold from abroad, net gold imports is considered as an indicator for total gold demand of the country.

India’s gold demand is primarily tied to rural populace, which depends on monsoon. A bumper crop following a good monsoon generally leads to surge in gold demand as farmers buy gold as a store of wealth for their earnings. So there is a chance of pick-up in gold demand in the latter half of the year. Further, the second half of the year is seasonally stronger in the country as demand increases around the wedding and festive seasons, when buying the yellow metal is considered auspicious. Expenditure on gold can account for almost 30% of the total wedding cost. This provides a boost to local currency demand and raises gold prices. Per the World Gold Council, in India, gold consumption in 2019 is expected at 750-850 tons compared with 760.4 tons in 2018 and a 10-year average of 838 ton.

In the last decade, combined demand for gold from India and China has soared 71%. The expanding middle class combined with broader economic growth will have a significant impact on gold demand. While demand remains strong in India and China, the prospects of a dwindling supply looms large on the global gold-mining industry. The combination of lower mined gold supply and higher demand, and geopolitical tensions could eventually drive the prices north, which bodes well for gold-miners.

Gold Industry Performance

The Mining - Gold industry has rallied 17% so far this year compared with the S&P 500’s growth of 13%. 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 9.11, much lower than the S&P 500’s EV/EBITDA multiple of 10.97.

Investors keen on the industry may consider AngloGold Ashanti Limited AU which sports a Zacks Rank #1 (Strong Buy). Further, Vista Gold Corp. VGZ and Gold Fields Ltd. GFI, both of which carry a Zacks Rank #2 (Buy) are good bets at the moment. You can see the complete list of today’s Zacks #1 Rank stocks here.

Investors may also consider Franco-Nevada Corp. FNV and Kirkland Lake Gold Ltd. KL which carry a Zacks Rank #3 (Hold). These stocks have positive earnings growth expectations for this fiscal and have been witnessing upward estimate revisions lately.

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