Gold Prices Are Going Higher, so Buy Barrick Stock, Says Analyst
By Al RootApril 10, 2019 3:29 p.m. ET
Photograph by Akio Kon/Bloomberg
Gold prices are up just 2% year to date. Shares of the companies that dig up the metal have fared a little better, but still trail behind the overall stock market.
The VanEck Vectors Gold Miners ETF is up 8.5% this year, 3.5 percentage points worse than the gain in the Dow Jones Industrial Average, but some on Wall Street think the metal’s underperformance is about to end. That means now is a good time to snap up gold-mining stocks, they say.
Deutsche Bank analyst Chris Terry upgraded shares of Barrick Gold (ticker: GOLD) to Buy from Hold on Wednesday. He increased his target price to $15 per share, 8% higher than current levels.
The back story: Gold is a funny commodity. Most of the demand is for speculation. Only a tiny fraction of gold is used in industrial or cosmetic applications.
The reverse is true for another yellow commodity, corn. No one stores field corn for long. It gets fed to animals or turned into products such as corn syrup and ethanol. What’s more, the world uses nearly all the corn produced in a given year. All the gold ever produced, on the other hand, is still available to be stored or traded.
The huge available supply relative to annual production is another reason that the gold market is odd. The price isn’t always linked to the cost of production. If a large mine goes off line, the gold price doesn’t budge.
Contrast that with commodities such as iron ore. When a Vale (VALE) dam holding mine waste broke in Brazil in January, production fell. Iron-ore prices have jumped more than 30% since then.
What’s new: Since the U.S. left the gold standard in 1971, gold has been a strong buy a couple of times. The first was when inflation got out of control in the late 1970s, while the other was when concerns about the health of the global financial system rose during the credit crisis.
Falling interest rates can also boost gold prices. Low absolute returns on paper assets can make gold look relatively attractive.
“Against the latest macro data, we are now increasing our gold price forecast by an average 7% for 2019 and 2020,” wrote Deutsche Bank analyst Chris Terry. If economic growth keeps slowing, the Federal Reserve would be less likely to raise interest rates, and could even have to lower them.
Terry’s new gold-price forecast is $1,350 a troy ounce by the end of the year, 3% higher than current levels.
Along with boosting his commodity forecast, Terry also raised his rating on shares of Barrick. The move was based, in part, on the higher price forecast, but opportunities to cut costs, save money via synergies, and divest assets also make him more positive on the stock.
Don’t forget. Barrick recently struck a deal with Newmont Mining (NEM) to pool certain assets. That should drive down costs and improve earnings for both producers.
Looking ahead: Gold miners have been stuck in neutral lately. The VanEck Gold ETF has lost investors about 1% a year, on average, for the last five years. That poor performance has left the sector trading at about 2.7 times sales, a 15% discount to the historical average.
Higher gold prices could be the catalyst needed to g
www.fotavgeia.blogspot.com
By Al RootApril 10, 2019 3:29 p.m. ET
Photograph by Akio Kon/Bloomberg
Gold prices are up just 2% year to date. Shares of the companies that dig up the metal have fared a little better, but still trail behind the overall stock market.
The VanEck Vectors Gold Miners ETF is up 8.5% this year, 3.5 percentage points worse than the gain in the Dow Jones Industrial Average, but some on Wall Street think the metal’s underperformance is about to end. That means now is a good time to snap up gold-mining stocks, they say.
Deutsche Bank analyst Chris Terry upgraded shares of Barrick Gold (ticker: GOLD) to Buy from Hold on Wednesday. He increased his target price to $15 per share, 8% higher than current levels.
The back story: Gold is a funny commodity. Most of the demand is for speculation. Only a tiny fraction of gold is used in industrial or cosmetic applications.
The reverse is true for another yellow commodity, corn. No one stores field corn for long. It gets fed to animals or turned into products such as corn syrup and ethanol. What’s more, the world uses nearly all the corn produced in a given year. All the gold ever produced, on the other hand, is still available to be stored or traded.
The huge available supply relative to annual production is another reason that the gold market is odd. The price isn’t always linked to the cost of production. If a large mine goes off line, the gold price doesn’t budge.
Contrast that with commodities such as iron ore. When a Vale (VALE) dam holding mine waste broke in Brazil in January, production fell. Iron-ore prices have jumped more than 30% since then.
What’s new: Since the U.S. left the gold standard in 1971, gold has been a strong buy a couple of times. The first was when inflation got out of control in the late 1970s, while the other was when concerns about the health of the global financial system rose during the credit crisis.
Falling interest rates can also boost gold prices. Low absolute returns on paper assets can make gold look relatively attractive.
“Against the latest macro data, we are now increasing our gold price forecast by an average 7% for 2019 and 2020,” wrote Deutsche Bank analyst Chris Terry. If economic growth keeps slowing, the Federal Reserve would be less likely to raise interest rates, and could even have to lower them.
Terry’s new gold-price forecast is $1,350 a troy ounce by the end of the year, 3% higher than current levels.
Along with boosting his commodity forecast, Terry also raised his rating on shares of Barrick. The move was based, in part, on the higher price forecast, but opportunities to cut costs, save money via synergies, and divest assets also make him more positive on the stock.
Don’t forget. Barrick recently struck a deal with Newmont Mining (NEM) to pool certain assets. That should drive down costs and improve earnings for both producers.
Looking ahead: Gold miners have been stuck in neutral lately. The VanEck Gold ETF has lost investors about 1% a year, on average, for the last five years. That poor performance has left the sector trading at about 2.7 times sales, a 15% discount to the historical average.
Higher gold prices could be the catalyst needed to g
www.fotavgeia.blogspot.com
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