Gold prices have been gaining this month aided by trade worries and weaker-than-expected jobs data. Speculations that the Federal Reserve is likely to lower interest rates this year, fueled gold prices further. So far this month gold prices have trended above the $1,300, clocking growth of 3.9% so far this year.
No Signs of Trade War Abetting: A Positive for Gold
The Trump administration announced that it will impose a 5% tariff on all imported goods from Mexico beginning June 10 and plans to gradually increase that tax to 25% until the illegal immigration stops. Further, the United States will be severing the preferential trade treatment for India, which the country's products worth billions of dollars from U.S. tariffs.
The ongoing U.S. trade war with China and these developments have traders and investors on tenterhooks. Safe haven demand came into play driving gold prices up.
Significantly Weak Jobs Data Adds to Gold’s Shine
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 forecasts of job growth of 185,000. In April, private-sector employment increased by 275,000.
Moreover, the employment scenario will worsen in the coming months as companies deal with potential supply-chain issues and margins which will be impacted by the intensifying tensions with some the United States’ largest trading partners. This added to concerns that the Federal Reserve will cut interest rates this year and led to a fresh surge in gold prices. Trade concerns and weak job data led to fall in the greenback which again works in favor of gold.
Gold Industry Performance
The Mining - Gold industry has rallied 15.4% so far this year compared with the S&P 500’s growth of 11.2% growth. 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 8.6, much lower than the S&P 500’s EV/EBITDA multiple of 10.5.
The prospects of a dwindling supply looms large on the gold-mining industry. Meanwhile, demand will remain strong with India and China acting as the major drivers. 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.
The second half of the year is seasonally stronger in India due to wedding and festive seasons. Demand for gold from the technology sector is also on the rise. 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.
Investors keen on the industry may consider AngloGold Ashanti Limited AU sporting 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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