Gold prices have lost about 10% so far this year and are now trending below the psychological level of $1,200. This can primarily be attributed to a stronger dollar. However it seems a bit early to write off the yellow metal, as demand is likely to pick up in the balance of the year on higher seasonal demand from India - gold's second biggest consumer. This will help gold regain its ground.
What is Going Against the Yellow Metal?
Stronger Dollar: The constant threat of an escalating trade conflict between the United States and China led investors to seek safe haven in dollar. This has also weakened yuan, making gold expensive in the world's largest consumer, China. Notably, a stronger dollar makes dollar-priced gold costlier for non-US investors.
Strong Manufacturing Data: The dollar also received extra boost from economic data that showed manufacturing growing at its fastest pace in 14 years. Per the Institute for Supply Management's ("ISM") latest report, manufacturing index advanced to a reading of 61.3% in August, up from July's 58.1% and ahead of the consensus mark of 57.2%. The index shows business conditions in the U.S. manufacturing sector and is considered a significant indicator of the overall economic condition in the United States. A reading above 50 is seen as a sign of economic growth. The August PMI indicates growth for the 112th consecutive month in the overall economy and the 24th straight month of growth in the manufacturing sector.
Robust Labor Market: The U.S. economy added 201,000 jobs in August, ahead of the consensus estimate of 193,000, adding jobs for the 95th straight month. Average hourly wages accelerated 10 cents to $27.16, driving the year-over-year increase to 2.9%, the biggest yearly rise since April 2009. The unemployment rate held steady at 3.9% - at a 19-year low.
Rate Hike Expectations Triggered: All these upbeat numbers have raised the prospects of the Fed hiking interest rates two more times this year with one expected in its FOMC meeting on Sep 25-26. Per current market speculations, there is a very high possibility of nearly 96% for a rate hike in the current month. Higher U.S. rates dent the appeal of gold as it does not offer much interest.
India Holds the Key to Recovery
India is likely to aid gold recover its lost sheen as reinforced by recent data from the country. India sources nearly all of its gold demand from abroad, net gold imports is considered as an indicator for total Indian gold demand. After falling in the first six months of the year, gold imports have picked up since July. Per a report by the GFMS team at Thomson Reuters, India's gold imports were at 100 tons in August 2018, a year-over-year surge of 116.5%. Lower prices prompted jewelers to buy ahead and replenish inventory for an international jewelry exhibition.
India annually consumes 800-850 tons of gold and rural India accounts for 60% of the country's gold consumption. Consequently, the demand is tied to rural populace which depends on monsoon. The monsoon period stretching from June to August traditionally exhibit a sluggish rate of purchase as most farmers are busy planting crops. A bumper crop following a good monsoon generally leads to surge in gold demand as farmers buy gold as a store of wealth for their earnings. So there is a chance of pick-up in gold demand in the latter half of the year. Further, the Indian government announced measures to bolster rural incomes. This along with forecast for a normal monsoon bodes well for the rural sector.
Further, the second half of the year is seasonally stronger in the country as demand increases around the wedding and festive seasons, when buying the yellow metal is considered auspicious. This begins from mid-to-late August and continues until January. Expenditure on gold can account for almost 30% of the total wedding cost. This gives a boost to local currency demand and raises
gold prices .
According to a report by the World Gold Council based on annual data from 1990 to 2015, gold demand is driven by income. For an increase of 1% in income per capita, gold demand rises by 1%. Consequently, the expanding middle class in India, combined with broader economic growth, will have a significant impact on gold demand, going forward.
Industry Valuation is Inexpensive
Zacks Mining - Gold Industry , which falls within the broader Zacks Basic Materials Sector , has underperformed both the S&P 500 and its own sector year-to-date. The industry has declined 32% while the Zacks Basic Material Sector dropped 1% and the Zacks S&P 500 Composite gained 16%.
One-Year Price Performance
However, the valuation looks really cheap now. One might get a good sense of the industry's relative valuation by looking at its Enterprise Value to Earnings before Interest Depreciation and Amortization (EV/EBITDA). This valuation is a good measure for the industry's given its complicated and capital-intensive nature.
The industry currently has a trailing 12-month EV/EBITDA ratio of 6.6, which looks inexpensive when compared with the market at large, as the trailing 12-month EV/EBITDA ratio for the S&P 500 is 11.8.
A comparison of the industry's EV/EBITDA ratio with that of its broader sector ensures that the industry is trading at a decent discount. The Zacks Basic Material Sector's trailing 12-month EV/EBITDA ratio of 7.8 is way above the Zacks Mining - Gold Industry's EV/EBITDA ratio of 6.6.
How to Play the Industry?
We suggest a few gold stocks that have a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and are witnessing upward estimate revisions. Earnings estimate revisions are 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 of them:
Northern Dynasty Minerals Ltd. NAK
Vancouver, Canada-based Northern Dynasty Minerals acquires, explores and develops mineral properties in the United States. The Zacks Consensus Estimate for Northern Dynasty Minerals is at a loss per share of 3 cents per share for fiscal 2018, an improvement from the prior estimate of a loss per share of 12 cents over the past 60 days. The company has an earnings growth projection of 82% for the current year. It has a Zacks Rank #2. You can see
the complete list of today's Zacks #1 Rank stocks here .
Pershing Gold Corporation PGLC
Lakewood, CO-based Pershing Gold explores, develops, and mines gold and precious metals in Nevada. The Zacks Consensus Estimate for Pershing Gold has been revised upward to a loss of 45 cents per share for fiscal 2018 from the prior estimate of a loss of 46 cents per share over the last 60 days. The company has an earnings growth projection of 10% for the current year. The stock carries a Zacks Rank #3.
IAMGOLD Corporation IAG
Toronto, Canada-based IAMGOLD explores, develops, and operates gold mining properties in North and South America as well as West Africa. The stock has witnessed positive earnings estimate of 6% for this year over the past 60 days. The Zacks Consensus Estimate for earnings is currently pegged at 17 cents, with an expected growth of 183%. It has a Zacks Rank #3.
Harmony Gold Mining Company Limited HMY
Randfontein, South Africa-based Harmony Gold Mining engages in the exploration and mining of gold in South Africa and Papua New Guinea. The Zacks Consensus Estimate for this year has moved up 44% over the past 30 days and is currently at 23 cents. This projects year-over-year growth of 77%. The stock has a Zacks Rank #3.
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Harmony Gold Mining Company Limited (HMY): Free Stock Analysis Report Northern Dynasty Minerals, Ltd. (NAK): Free Stock Analysis Report Pershing Gold Corporation (PGLC): Free Stock Analysis Report Iamgold Corporation (IAG): Free Stock Analysis Report To read this article on Zacks.com click here.