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Gold Shoots to 1-Year High on North Korea Nuke Test

Gold prices soared to its highest in almost a year on North Korea's claims of successfully testing its most powerful nuclear bomb ever. This threatening move rattled markets, driving investors away from stocks to safe haven assets such as gold.

Gold peaked to $1,339.47 an ounce, at par with levels last witnessed in Sep 2016. Gold has exhibited a bullish run so far this year, gaining 16%, riding on the back of a weaker dollar and escalating tensions between the United States and North Korea. With North Korea's aggressive stance aiding the yellow metal break the threshold limit of $1,300 an ounce this year.

On Sep 3, North Korea successfully conducted its sixth nuclear test, of an advanced hydrogen bomb. It is claimed to be small and light enough to be mounted on an intercontinental ballistic missile. The test triggered a 6.3 magnitude tremor indicating that the size of the nuclear test was more powerful than the atomic weapons used by the United States during World War II. North Korea had made such claims in the past but had not attained this feat previously. The United States retaliated with a threat of a "massive" military response if it or its allies were put at risk.

This test comes on the heels of North Korea firing a missile on Aug 29 that passed over Hokkaido, the second largest island of Japan before landing in the sea. Japan's Prime Minister Shinzo Abe stated that it was an unprecedented, serious and grave threat to Japan. U.S. President Donald Trump responded by saying 'all options on table' when it comes to dealing with Pyongyang.

Over the last few years, North Korea has been striving toward becoming a legitimate nuclear power. The relationship between the United States and North Korea has soured significantly. If North Korea has indeed successfully tested a hydrogen bomb that can be mounted on an intercontinental ballistic missile, then the threat to the United States and its allies increases dramatically. Mounting fears regarding what next - negotiation or war - works in favor of gold which is considered a good store of value during political turmoil.

Further, ongoing uncertainty over the economic agenda of President Trump and mounting speculation on whether the Fed will deliver a third rate hike this year has fueled the price rise. Gold prices rallied recently on tepid job data. The Labor Department stated nonfarm payrolls increased by 156,000 in August, much below the economists' forecast of an increase of 180,000. Also, inflation has remained stubbornly low. This has led investors and analysts to expect the Fed to become more accommodative with monetary policy.

Consequently year to date, the gold industry has outperformed the S&P 500. The industry has gained 17.9% in contrast with the S&P 500's increase of 10.7%.

Valuation looks attractive for industry going by the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) multiple, a preferred valuation metric for cyclical industries. The industry has a trailing 12-month EV/EBITDA multiple of 7.7 lower than the S&P 500 EV/EBITDA multiple of 11.0. The industry's lower-than-market positioning calls for some more upside moving ahead.

Gold miners have also experienced a surge this year in sync with gold prices and outdid the industry and S&P 500 as well. To name a few, IAMGOLD Corporation IAG , Seabridge Gold Inc. SA , Gold Fields Limited GFI Royal Gold, Inc. RGLD and Kinross Gold Corporation KGC yielded attractive year-to-date returns of 74.3%, 50.3%, 48.8%, 46.6% and 44.4%, respectively.

We believe continuing geopolitical tensions, seasonal retail demand from Asia, looming uncertainty over another rate hike will keep the interest alive in gold this year. For investors keen on this industry, Golden Star Resources Ltd. GSS can be a solid addition to one's portfolio, backed by a solid Zacks Rank and healthy growth projections. Golden Star Resources sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today's Zacks #1 Rank stocks here .

Golden Star Resources has an expected earnings growth of 50% for fiscal 2017 and 183.33% for fiscal 2018.

We suggest investors to add Alamos Gold Inc. AGI , Kinross Gold and Randgold Resources Limited to their watch list. These stocks carry a Zacks Rank #3 (Hold) and their estimates have moved north recently. Earnings estimate for Alamo Gold for fiscal 2017 has gone up 34.48% and for fiscal 2018 has moved up 9.09%. Kinross Gold's estimates have gone up 30.61% for fiscal 2017 and 23.46% for fiscal 2018. Earnings estimates for Randgold for fiscal 2017 and 2018 have gone up 7.15% and 3.36%.

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Kinross Gold Corporation (KGC): Free Stock Analysis Report

Gold Fields Limited (GFI): Free Stock Analysis Report

Iamgold Corporation (IAG): Free Stock Analysis Report

Alamos Gold Inc. (AGI): Free Stock Analysis Report

Royal Gold, Inc. (RGLD): Free Stock Analysis Report

Golden Star Resources, Ltd (GSS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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