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Gold Recovers, Hits 2-Week High on Renewed North Korea Fears

Zacks Equity Research

Gold prices climbed to its strongest level in more than two weeks yesterday driven by a weaker dollar and as tension flared up once again between the United States and North Korea. Further, return of Chinese traders after a week-long holiday helped boost the metal’s price.

Spot gold was up 0.4% at $1,279.99 an ounce after touching $1,284.97, its highest level since Sep 29. Last week, the bullion had logged a fourth-straight weekly loss due to a stronger dollar, strength in U.S. equities and growing expectations of a rate hike by the Fed in December.

President Trump’s Tweets Rekindle North Korea Fears

Safe haven demand for the yellow metal received a boost as the latest tweets by U.S. President Donald Trump were construed by investors as that the United States-North Korea standoff could be about to enter a new phase. Per the President’s tweets, years of talking with North Korea over its nuclear buildup have proved futile and that “only one thing will work.” This gave rise to conjecture that military action was on Trump’s mind.

North Korean leader Kim Jong Un said his nuclear weapons are a “powerful deterrent” which assure North Korea’s sovereignty. Last week, President Trump had commented during a photo session with senior military officials that the gathering could represent “the calm before the storm.” No further light was thrown on the comment though.

Gold Q3: In Review

Gold hit its lowest point of the quarter in early July, when it fell to $1,204 per ounce on higher expectations of a rate hike. Gold prices peaked to $1,351 an ounce on Sep 8, the highest this year, on escalating tensions between the United States and North Korea.

Despite rising to above $1,300 level in September, gold prices subsequently went on the back foot as investors grow more optimistic about the prospect of U.S. rate hikes and tax cuts that are likely to boost the U.S. economy. Further, with the North Korean conflict taking a back seat for some time and strong numbers coming in from the United States, investors have renewed appetite for riskier assets, which has dulled the demand for safe-haven gold.

Nevertheless, gold gained 5% in the third quarter. Gains from a weaker US dollar and geopolitical tensions between the United States and North Korea were the main highlights. The Fed also drove gold prices during the quarter. The central bank suggested at its last meeting that it will implement one more interest rate hike later this year and another three in 2018.

What Lies Ahead for Gold?

Gold had a good start to the fourth quarter. However, gold’s upside may be dented as the dollar is likely to strengthen on expectations of the Fed hiking interest rates in December. However, geopolitical tensions, terrorist attacks might fuel safe haven demand and prop up gold prices. Further, prices will be aided by retail demand in India as last quarter of the year is seasonally strong for gold in India, with the upcoming Diwali festival and wedding season.

Improved Price Performance, Attractive Valuation
 


In the third quarter, the Zacks Gold Mining industry has gained 5.7%, outperforming the S&P 500’s advance of 3.8%.

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 7.36, lower than the S&P 500 EV/EBITDA multiple of 11.49. The industry’s lower-than-market positioning calls for some more upside moving ahead.

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

Kirkland Lake Gold Ltd. KL engages in the exploration and development of gold properties. The company owns and operates five underground gold mines, including the Macassa mine, the Holt mine, and the Taylor mine in Ontario, Canada; and the Fosterville Mine in Victoria and the Cosmo Mine in Northern Territory, Australia, as well as four milling facilities in Canada and Australia.

The company has a market capitalization of $2.99 billion. It carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past 60 days, the Zacks Consensus Estimate for earnings for 2017 has moved up 21% and for 2018 has gone up 46%.

B2Gold Corp. BTG together with its subsidiaries, engages in the exploration and development of mineral properties in Nicaragua, Philippines, Namibia, Mali, Colombia, Burkina Faso and Finland. The company has a market capitalization of $2.66 billion.

The stock carries a Zacks Rank #2. In the past 60 days, the Zacks Consensus Estimate for earnings for 2017 has moved up 33% and for 2018 has gone up 4%.

Asanko Gold Inc. AKG engages in the exploration, development and production of gold properties. The company has a market capitalization of $198.4 million.

The stock carries a Zacks Rank #2. In the past 60 days, the Zacks Consensus Estimate for earnings for 2018 has moved up 20%.

We suggest investors to add Barrick Gold Corp. ABX and Golden Star Resources Ltd. GSS to their watch list. These stocks carry a Zacks Rank #3 (Hold) and their estimates have moved north recently. Earnings estimate for Barrick Gold fiscal 2017 has gone up 1% for both fiscal 2017 and 2018. Earnings estimates for Golden Star Resources for fiscal 2017 and 2018 have gone up 50% and 24%, respectively.

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Barrick Gold Corporation (ABX) : Free Stock Analysis Report
 
Asanko Gold Inc. (AKG) : Free Stock Analysis Report
 
Golden Star Resources, Ltd (GSS) : Free Stock Analysis Report
 
B2Gold Corp (BTG) : Free Stock Analysis Report
 
Kirkland Lake Gold Ltd. (KL) : Free Stock Analysis Report
 
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