Gold prices hit a one-month high of $1,240 an ounce on Dec 3 as the United States and China agreed to a temporary truce in their trade war at the G20 summit held in Argentina from Nov 30-Dec 1. The dinner meeting between President Trump and his Chinese counterpart Xi Jinping resulted in a cease-fire in the ongoing trade dispute between the world's two largest economies, sending the dollar reeling and sparking an upside in gold prices.
The alleviation of trade war tensions between the United States and China sparked a rally in global stock markets and commodities. The Dow Jones Industrial Average was up 1.1% or 287.97 points, while the S&P 500 added 30.20 points or 1.1%. The Nasdaq Composite Index gained 1.5% or 110.98 points. After hitting a one-month high of $1,240 an ounce, gold prices closed at $1,239.60 an ounce on Dec 3.
What Led to Gold’s Turnaround?
At the much awaited meeting, President Trump and Chinese President Xi agreed to a 90-day delay to make time for further negotiations. The United States has agreed on refraining from imposing planned increase in tariffs from 10% to 25% on $200 billion which was supposed to come into effect from Jan 1, 2019 on Chinese goods exports. Per the truce, China will buy a substantial amount of U.S. agricultural, energy and industrial products. The two sides agreed to launch negotiations to reduce trade tensions further and discuss forced technology transfer, intellectual-property protection, non-tariff barriers, and cyber and agriculture issues, among other concerns over the next 90 days. President Trump also tweeted that China had agreed to “reduce and remove” tariffs on U.S. cars, now set at 40%.
This development put dollar under pressure with investors leaving the safe-haven of U.S. currency and buying riskier assets. So far this year, the constant threat of an escalating trade conflict between the United States and China led investors to seek safe haven in dollar, in turn decimating gold prices. Notably, gold prices have suffered a decline of 3.3% over the past year owing to a stronger dollar. Further, higher U.S. rates dented the appeal of gold as it does not offer much interest. This temporary cessation of hostilities will act as a major tailwind.
Industry Valuation is Inexpensive
Over the past year, the Gold Mining industry has declined 13% against the S&P 500’s growth of 6%.
Going by the EV/EBITDA multiple (a preferred valuation metric for mining companies that have high capital expenditures), the gold mining industry has a forward 12-month EV/EBITDA multiple of 6.5, much lower than the S&P 500’s EV/EBITDA multiple of 11.0. The industry’s lower-than-market positioning calls for some more improvement in the near term.
How to Play the Industry?
None of the stocks in the gold-mining space currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. We suggest a few gold stocks that have a favorable Zacks Rank #3 (Hold) and are witnessing upward estimate revisions. Earnings estimate revision is the most powerful force impacting stock prices. Stocks with rising earnings estimates have a tendency to perform better than the other stocks in the group even if the industry fundamentals remain sluggish. Below we have highlighted some such stocks:
AngloGold Ashanti Limited AU: This Johannesburg, South Africa-based gold mining company currently carries a Zacks Rank #3.The Zacks Consensus Estimate for earnings for fiscal 2018 and fiscal 2019 have both gone up 4% over the past 30 days.
Franco-Nevada Corporation FNV: Toronto, Canada based gold-focused royalty and stream company is a Zacks Ranked #3 stock. The Zacks Consensus Estimate for fiscal 2018 and 2019 has moved north 2% and 6%, respectively, over the past 30 days. The company has average positive earnings surprise of 5.50% over the trailing four quarters.
Kirkland Lake Gold Ltd. KL: This Toronto, Canada-based company engages in the exploration and development of gold properties. It carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings for fiscal 2018 and 2019 has gone up 3% and 1%, respectively, over the past 30 days. The company has delivered average positive earnings surprise of 9.37% over the trailing four quarters.
Newmont Mining Corporation NEM: This Greenwood Village, CO based gold miner carries a Zacks Rank #3. The Zacks Consensus Estimate for earnings for fiscal 2018 and fiscal 2019 have both gone up 4% over the past 30 days. The company has average positive earnings surprise of 16.10% over the trailing four quarters.
Osisko Gold Royalties Ltd OR: The Zacks Consensus Estimate for earnings for this Montreal, Canada based gold company has gone up 25% and 38% for fiscal 2018 and 2019, respectively, over the past 30 days. It carries a Zacks Rank #3. The company has average positive earnings surprise of 50.00% over the trailing four quarters.
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