India, the world’s second largest gold consumer after China, reported a drop of 39% in gold imports in the first five months of 2018. The setback can primarily be attributed to higher prices that dented demand along with timing of festivals and a stronger dollar.
Reasons for the Disappointing Performance
As India sources nearly all of its gold demand from abroad, net gold imports is considered as an indicator for total Indian gold demand. A weaker rupee so far in 2018 made gold imports costlier which combined with waning demand led to lower overseas purchases. Moreover, buyers preferred alternative investments as the equity market has been giving better returns lately.
Further, a shift in interest of the younger generation toward high-end consumer goods has affected demand for the yellow metal. A surge in demand for smartphones, televisions and other goods has made electronics the second-largest imported item substituting gold. Notably, the list is still led by oil.
Per the World Gold Council, following the strongest fourth-quarter on record, Indian jewelry demand witnessed a sharp downturn in first-quarter 2017, falling 12% year over year to 87.7 tons. This marked the third weakest quarter in India’s jewelry market for ten years as a depreciating rupee amplified the rise in the international gold price. Moreover, the lack of auspicious days led to lower sales in the quarter.
India to Rebound
India annually consumes 800-850 tons of gold and rural India accounts for 60% of the country's gold consumption. Consequently, the demand is tied to rural populace which depends on monsoon. In fact, the monsoon period stretching from June to August traditionally exhibit a sluggish rate of purchase as most farmers are busy planting crops. 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 Indian government announced measures to bolster rural incomes. This along with forecast for a normal monsoon bodes well the rural sector.
The second half of the year is seasonally stronger in the country as demand increases around the wedding and festive seasons, which begin from mid-to-late August and continue until January. Expenditure on gold can account for almost 30% of the total wedding cost. This gives a boost to local currency demand and raises gold prices.
According to a report by the World Gold Council based on annual data from 1990 to 2015, gold demand is driven by income. For an increase of 1% in income per capita, gold demand rises by 1%. Consequently, the expanding middle class in India, combined with broader economic growth, will have a significant impact on gold demand.
Rising geopolitical tensions will aid gold prices this year despite the prospect of two more rate hikes. China much like its neighbor India will continue to be a growth driver as people view gold, whether in the form of bars, coins or jewelry, as a natural medium for savings and diversification. Lately, it has been observed that 18-carat Gold and 3D hard gold jewelry continued to gain market share in China as consumers are increasingly tempted by the innovative, fashionable, non-traditional designs offered in these categories. The jewelry trade is now focusing more on branding and customer service and a recovery in jewelry demand is expected in 2018.
The United States continues to be a strong market on the back of economic growth and improving employment levels. Demands from central banks also remain robust with Turkish and Russian central banks, adding to their gold reserves. Further, gold is witnessing increased requirement in technology, bolstered by demand for high-end smartphones after years of decline.
Valuation is Inexpensive
So far this year, the Gold Mining industry has dropped 5% compared with the S&P 500’s gain of 2%. 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 8.3, much lower than the S&P 500’s EV/EBITDA multiple of 11.3. The industry’s lower-than-market positioning calls for some more improvement in the near term.
Consequently, we suggest 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 year-over-year rise of 3%.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Yamana Gold Inc. AUY: The Zacks Consensus Estimate for this Toronto, Canada-based gold miner for the current-year EPS has moved north 8% over the last 60 days. The Zacks Consensus Estimate for fiscal 2018 depicts year-over-year growth of 63%. The stock carries a Zacks Rank #2. The company has delivered a positive average earnings surprise of 25% 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 company’s Zacks Consensus Estimate for fiscal 2018 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. It carries a Zacks Rank #2.
However, we suggest investors to steer clear of stocks such as AngloGold Ashanti Limited AU and New Gold Inc. NGD which carry a Zacks Rank #5 (Strong Sell) and have been witnessing negative revisions in their earnings estimates lately.
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