The year-to-date performance is moderate for gold bullion (up about 13%) due to the safe-haven rally. The coronavirus outbreak had kept global markets edgy at the start of the year and boosted the appeal for this precious metal.
Things appear brighter for gold bullion as well as gold mining companies in Q2 too. Mining stocks hail from a favorable Zacks industry (placed at the top 8% of total 250+ industries in the Zacks universe) (read: Gold Mining Q1 Earnings Mixed: ETFs Gain on Fundamentals).
Behind the Drivers
The Fed has been acting super-dovish since March. Its policy easing, announced on Apr 9, included the investment of “up to $2.3 trillion in loans to aid small and mid-sized businesses and state and local governments as well as fund the purchases of some types of high-yield bonds, collateralized loan obligations and commercial mortgage-backed securities.”
However, most recently, the Fed announced that it is willing to the expand the terms of its $600 billion yet-to-be implemented Main Street Lending Program to make it accessible to a greater number of struggling companies.
This was on top of the Fed’s zero rate policy in the United States and launch of an infinite QE as well as announcement of the buying of highly-rated corporate debt. Such measures should keep the dollar’s strength in check. U.S. dollar ETF Invesco DB US Dollar Index Bullish Fund UUP is down about 3.6% in the past month.
Low oil prices are another plus. Mining companies’ 50% of production costs are closely linked to energy prices. Chances of a decline in oil prices amid poor refiners’ margins and moderate rebound in economic activity should work wonders for gold miners’ operating margins. Notably, coronavirus-led demand disruptions have been weighing on oil prices.
Cheaper valuation and relatively low debt are other positives. Price/Book ratio for the gold mining industry stands at 1.87X versus 3.98X of the S&P 500. Debt/Equity ratio is also favorable for miners (0.01X) compared with the S&P 500 (0.76X).
Chances of increased M&A activities should boost the space even more. Arnaud du Plessis, a portfolio manager for CPR Asset Management in Paris, believes gold miners are in better financial shape than in 2008, so they are generating a spike in free cash flow as the price of gold is rising. Analysts are of view that conditions are apt for rising M&A in the gold mining space.
Safe-Haven demand for gold will stay strong despite bear market rallies as several Wall Street analysts still believe the latest rally doesn’t have legs. Plus, not only the Fed, most developed and emerging economies have been on a policy easing mode, offering a hefty stimulus to fight the novel coronavirus.
The ECB and the BoJ have benchmark interest rates in the negative territory. Right now, real U.S. treasury yields are negative from five-year to 20-year term and this lowers the opportunity cost of holding a non-interest-bearing asset like bullion.
Stocks & ETFs in Focus
Against this backdrop, we highlight a few gold mining stocks and ETFs that appear healthy bets now.
AngloGold Ashanti Limited (AU)
Headquartered in Johannesburg, South Africa, it is the third-biggest gold mining company globally in terms of production. The stock has a Zacks Rank #1 (Strong Buy). The stock has lost about 8.4% past month.
Alamos Gold Inc. (AGI)
The Canadian-based intermediate gold producer with diversified production from three operating mines in North America also has a Zacks Rank #2. The stock is down 5.8% in the past month.
VanEck Vectors Gold Miners ETF GDX
The large-cap gold mining fund has lost about 2.3% in the past month against about 9% advancement in the S&P 500.
VanEck Vectors Junior Gold Miners ETF GDXJ
The fund is focused on small-cap gold mining companies. The product has gained 5.9% in the past month.
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