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Jury out on gold rally despite slowdown fears

Nicki Bourlioufas  |  04 Apr 2019Text size  Decrease  Increase  |  
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Gold stocks have rallied in recent times driven by safe haven buying from investors who fear a global economic slowdown. However, analysts are mixed on whether gold stocks’ gains can be sustained through 2019.

Gold jumped above US$1,300 per ounce in January and maintained its gains above that level in February and March after the US Federal Reserve changed its plans to keep on raising rates.

While the precious metal has since given up some of its gains, it could test the key US$1365 level this year depending on how successful Europe, the US and China are in offsetting an economic downturn, experts say.

“If the global economy doesn’t respond to a pause in rate rises by the US and stimulus by the Chinese, gold [could] bounce and continue through the US$1365 level,” says Sam Berridge, portfolio manager and resource analyst at Perennial Value.

On the other hand, if Chinese stimulus measure are successful, then gold may pull back, he says.

Aussie gold stocks jump

Gold stocks listed on the ASX have jumped higher too as concerns of a global slowdown have increased. Over the year to 3 April, the S&P/ASX All Ordinaries Gold is up 21.1 per cent, compared to the S&P/ASX 200 which is up 14.1 per cent.

Mathew Hodge, senior resources analyst with Morningstar, says Newcrest Mining (ASX: NCM) may benefit the most among big miners from any further upswing in the gold price. 

“They’ve got the longest life of any of the major gold miners so if they can get incremental improvements in their operations, that can carry on for a long time. They also have a good management team in place,” says Hodge.

Hodge has a fair value of $23 on Newcrest, which was quoted at $24.64 on 4 April. In contrast, Hodge says Regis Resources (ASX: RRL) is overvalued at $5.07 compared to his fair value of $3.20.

Matt Griffin, small caps co-portfolio manager at AMP Capital, says he has a “constructive” view on the ASX gold sector, although stock selection is critical in finding winners and avoiding poor performing gold miners.

“A volatile macro environment coupled with expectations for rate rises being pushed out should continue to support the gold price, and the falling Australian dollar has been a huge tailwind for domestic producers,” says Griffith.

“To date we have seen the mid-tier producers Northern Star Resources (ASX: NST), Evolution Mining (ASX: EVN), Regis Resources, Saracen (ASX: SAR) and St Barbara (ASX: SBM) enjoy the biggest gains, which has been driven by investors wanting exposure to safe and steady operations in highly liquid stocks,” says Griffith.

“Going forward there are opportunities for some of the smaller producers and developers to re-rate towards the type of multiples that the mid-tier miners are trading on. There is real value in this sector of the market if management teams can execute and deliver on their promises,” says Griffith.

Perennial’s Berridge favours Silver Lake Resources (ASX: SLR), which is currently merging with Doray Minerals (ASX: DRM).

“Once combined, the merged entity will represent a legitimate Australian based mid-cap alternative to its richly priced peers. Due to mine scheduling, both Silver Lake and Doray should see a material improvement in second half cash flows, which combined with its modest enterprise value, will demand investor attention,” he says.

However, Brett Evans, managing director of Atlas Wealth Management, doesn't expect any further rally in the gold price given the easing in trade tensions between the US and China and receding fears of rising inflation in the US and Europe. Nor does he recommend gold as an investment to investors.

“Gold, like any commodity, is a trading tool or a hedge. Unless you are investing in gold stocks that provide a dividend income then the only way to make money is when you sell it. If the price of gold were to fall below your entry price then you either have to sell out at a loss or wait until the price recovers, which may take some time,” said Evans.

Having said that, another feature of the gold sector this year is an expected increase in merger and acquisitions activity, with most of the larger ASX producers having surplus capital available and looking for growth opportunities, says Griffith.

“There will likely be opportunities to pick up assets that fall out of the mega-mergers taking place between some of the large global producers,” he says.

 

is a Morningstar contributor.

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