Gold Gets Back Lustre In Volatile Times: Will It Last?
Gold prices have been trending up lately, making it the best performing commodity this year after three years of losses. Prices of the yellow metal jumped above the psychologically important level of $1,200 an ounce as investors flocked to the safe haven asset.
Last year, a stronger greenback, slump in oil prices and the climb in U.S. equities led to a more than 11% decline in gold’s value. With the Federal Reserve finally ending an era of near-zero interest rates with the December lift-off, gold slouched to six-year lows. The reversal of fortune for the yellow metal this year reflects the all-around uncertainty characterized by volatile stock markets, slowdown in China and a relatively weakening dollar.
Broken China
China's stock market has been shaken by the slowdown in the country's economy and Beijing's failed efforts to stabilize its financial markets. China’s GDP moderated to 6.8% for the fourth quarter, its lowest reading since the financial crisis. The 6.9% growth for 2015 was a marked deceleration from the 7.3% gain last year and its weakest in 25 years.
The Caixin Manufacturing PMI in China came in at 48.4 in Jan 2016, almost flat with December’s reading of 48.2. The index has been in a contraction since Mar 2015. Production fell for the second successive month in January.
The International Monetary Fund (IMF) projects growth in China to moderate to 6.3% in 2016 and 6% in 2017, reflecting weaker investment growth as the economy continues to rebalance. Given the gloom in China, the international organization also trimmed its 2016 world growth outlook to 3.4% from its earlier estimate of 3.6%. Global stocks are edging lower amid lingering concerns about China’s economy and a fresh bout of volatility in oil prices.
U.S. Also Disappoints
The U.S. economy entered 2016 with little momentum from some of its key drivers, with consumers cutting back on spending and factories being weighed down by tepid global demand. This helped to prop up gold prices.
U.S. gross domestic product expanded at a meager 0.7% in the fourth quarter of 2015. Weaker consumer spending, falling exports and a smaller build-up in business inventories led to the fourth-quarter slowdown. The economy expanded at 2.4% in 2015, the same rate as in 2014. The U.S. hasn’t seen 3% growth since 2005.
While the slowdown is hard to deny, some areas of the economy appear to be doing OK. This is particularly the case with the labor market, which showed strong gains in hourly earnings as well as the unemployment rate in January, even though the ‘headline’ job gains came in on the weak side.
This loss of momentum has had direct Fed implications, with many in the market skeptical of the central bank’s announced plans for four interest rate hikes this year. While the Fed Chairwoman tried to strike a balance in her Congressional testimony by talking up the outlook for the U.S. economy while cautioning about the international backdrop, this failed satisfy market participants who seem to be looking for an outright announcement of no more hikes this year.
The central bank is in a tight spot, which has added to market uncertainty and heightened volatility. The resultant safe-haven flows into U.S. treasury bonds have pushed down benchmark yields to very low levels.
Rising Political Uncertainties
Geopolitical tensions are a tailwind for gold prices, as the metal is considered to be a safe-haven asset in times of turmoil. In January, North Korea raised alarm with its announcement that it has successfully carried out its first underground test of a hydrogen bomb, a weapon more powerful than an atomic bomb.
If the claims are to be believed, it would be its fourth nuclear test since 2006 and a huge stride in its nuclear capabilities. The news came days after tension intensified between Saudi Arabia and Iran following the former’s execution of a prominent Shiite cleric.
Uncertainty in the financial markets also prompted a flight to safety. If the dollar keeps weakening, then gold prices will continue to climb. Dollar weakness usually benefits gold as it boosts the metal's appeal as an alternative asset and makes dollar-priced commodities cheaper for holders of other currencies. Rising gold prices would bring some relief to the beleaguered gold miners who were riddled with falling gold prices and had to cut down on exploration costs to stay afloat.
The spike in gold prices has led to a surge in the share prices of many gold miners. Among others, Sibanye Gold Ltd. (SBGL - Snapshot Report), Golden Star Resources, Ltd. (GSS - Snapshot Report), Barrick Gold Corp. (ABX - Analyst Report), AngloGold Ashanti Ltd. (AU - Snapshot Report), Gold Fields Ltd. (GFI - Snapshot Report), IAMGOLD Corp. (IAG - Snapshot Report), and Newmont Mining Corp. (NEM - Analyst Report) have witnessed more than a 40% rise in their share prices year to date.
Sector Level Earnings Trend
As per the Zacks classification, the gold-mining industry comes under the broader Basic Materials sector. 70% of the companies in the sector have reported their fourth-quarter numbers so far, with a 23.3% drop in earnings on the scoreboard. Taking into account all the companies that are yet to report, a 22.9% drop is projected for the fourth quarter.
We expect the scenario to improve somewhat in the first half of 2016, with expected declines of 16.2% in the first and 9.7% in the second, still in negative territory. However, a dramatic recovery is projected for the latter half of the year with 7% growth in the third and 16.4% in the fourth. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)
Industry Ranking & Outlook – Positive
We rank all of the more than 257 industries in the 16 Zacks sectors based on the earnings outlook for the constituent companies in each industry. This ranking is available on the Zacks Industry Rank page. http://www.zacks.com/stocks/industry-rank
The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 257+ companies is that the outlook for the top one-third of the list (Zacks Industry Rank of #86 and lower) is positive, the middle one-third (between #87 and #172) is neutral while the outlook for the bottom one-third (Rank #173 and higher) is negative.
Currently, the gold mining industry is in the top tier with a Zacks Industry Rank of #76, indicating a positive outlook.
What's Next?
A delay in raising interest rates elevates demand for gold, which produces no income but relies on price appreciation to attract investors. Gold prices will get support from retail demand for gold in the latter part of the year given that it is a seasonally strong period in countries like India and China. India is currently the world’s top gold consumer and lower prices, easing of import norms and better prospects for economic growth will pave the way for rising demand. Moreover, demand from the Central bank will support prices as this sector has been remarkably consistent.
Another factor that will eventually be a tailwind for gold is that the supply of the precious metal has already attained peak levels as per reports. Lower gold prices in the past few years and cost pressure had restricted the ability of gold producers to invest in new projects.
Production of gold is likely to decline by 3% in 2016, thus ending a seven-year stint of rising output. Lower mined gold supply could help prices navigate north. A positive outlook for the industry reinforced by expectations of earnings growth eventually in 2016 makes a good case for the gold mining industry.
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