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Gold Prices Trending Above $1,400: Will the Rally Sustain?

Madhurima Das

Gold prices is currently trending above $1,400 an ounce — at levels last seen in 2013, fueled by safe haven demand triggered by uncertainty over the U.S.-China standoff and geopolitical uncertainties. Further, a weaker greenback and slumping bond yields fueled gold prices. So far this year gold prices have gained 10.6%. The yellow metal had witnessed a drop of 2.1% in prices in 2018.

The dollar has slumped with the Federal Reserve signaling possible rate cuts of as much as half a percentage point later this year. The 10-year Treasury yieldhas also declined to 2% — the lowest level since 2016. Lower interest rates decrease the opportunity cost of holding non-yielding gold and weigh on the dollar, making gold cheaper for investors holding other currencies.

The prolonged trade war between the United States and China already has traders and investors on tenterhooks this year. Low expectations of a decisive breakthrough for talks between President Trump and Xi Jinping at the upcoming G20 Summit in Osaka, has also bolstered gold prices. The ongoing US-Iran tension also boosted safe haven demand for gold. Further, Trump announced new hard-hitting economic sanctions on Iraq in response to the shooting down of a U.S. Navy surveillance drone over the Strait of Hormuz.

Total non-farm 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. This adds to concerns that the Federal Reserve will cut interest rates this year which is conducive to gold prices.

Gold Industry Performance

The Gold Mining industry has rallied 29.0% so far this year compared with the S&P 500’s growth of 16.4%. 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 9.3, much lower than the S&P 500’s EV/EBITDA multiple of 11.3.

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. 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.

We suggest four gold-mining stocks that have a Zacks Rank of #1 (Strong Buy) or 2 (Buy) and have outperformed the industry. You can see the complete list of today’s Zacks #1 Rank stocks here.

AngloGold Ashanti Limited AU: This Johannesburg, South Africa-based company sports a Zacks Rank #1. The Zacks Consensus Estimate for earnings has moved up 35% over the past 90 days, indicating year-over-year growth of 90.57%. The company has a long term estimated earnings growth rate of 19.44%. The stock has gained 41.5% year-to-date, outperforming the industry’s rally of 29%.

Vista Gold Corporation VGZ: Shares of this Littleton, CO-based company have gained 54.2% year-to-date, ahead of the industry’s growth of 29%. The stock currently carries a Zacks Rank #2. The Zacks Consensus Estimate for earnings for fiscal 2019 has gone up 10% over the past 90 days.

Franco-Nevada Corporation FNV: The Zacks Consensus Estimate for earnings for this Toronto, Canada-based company suggests year-over-year growth of 11.97%. Further, the estimate has moved north 8% over the past 90 days.  The company has an average positive earnings surprise history of 6.38% over the trailing four quarters.  The company has a long-term estimated earnings growth rate of 4% and a Zacks Rank #2.

Gold Fields Limited GFI: This Sandton, South Africa-based company currently carries a Zacks Rank #2. The Zacks Consensus Estimate for fiscal 2019 has gone up 200% over the past 90 days. The stock has surged 59.6% year-to-date, outperforming the industry’s rally of 29%.

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