It was indeed the Monday morning blues for the yellow metal as prices plunged to the lowest levels in five years. The precious metal lost its sheen on a strengthening dollar and China’s shocking revelation after six years about its gold holdings which was much lower than market expectations.
Of late, strong economic data from the U.S has reinforced the belief that an interest rate rise is finally in the offing, which sent the greenback soaring. There is an inverse relationship between the U.S. dollar and the price of gold. Moreover, easing tensions in Greece, upbeat global equities and weak demand from top consumers India and China pushed gold prices to the bearish territory.
On top of this, China shocked the bullion market with the revelation of its official gold holdings for the first time since 2009 on Friday. It put an end to years of speculation and rumors of Beijing quietly piling up its gold reserves since prices began to decline. According to data from the country’s central bank, China’s gold reserves stood at 1,658 tons at the end of June. In Apr 2009, its gold holdings were 1,054 tons.
China has overtaken Russia to become the fifth largest holder of gold in the world, behind only the US, Germany, the International Monetary Fund, Italy and France, who are the world’s largest gold holders, according to the World Gold Council.
However, the addition of 600 tons of gold was almost one third of what the market had estimated. This triggered heavy selling in early Asian trading hours and sent gold prices nose-diving to $1,080 an ounce, the lowest since Mar 2010, before recovering ground at above $1,100 per ounce. This in turn led shares of big gold producers to slump, wiping billion of dollars from their market value. This is another nail in the coffin for a sector that has been cutting costs, trimming production and divesting assets to stay afloat.
Barrick Gold Corp. ABX, the world's top producer of the metal hit its 52-week low of $7.41 on Monday, losing 15% of its value overnight, trading at levels last seen in 1989. Shares of Newmont Mining Corp. NEM, Goldcorp Inc. GG and Kinross Gold Corp. KGC were down over 12%. Among others, AngloGold Ashanti Ltd AU, Yamana Gold, Inc. AUY, Royal Gold, Inc. RGLD, Alamos Gold, Inc. AGI, Eldorado Gold Corp. EGO, Gold Fields Ltd. GFI and Seabridge Gold, Inc. SA slumped to their 52-week lows yesterday.
Price below $1,100 an ounce will be a nightmare for many a producer as that is the break-even cost for many. Impending interest rate increases in the second half of 2015 and a stronger U.S. dollar will keep gold prices under pressure throughout the year. Waning off of geopolitical tensions will also weigh on gold prices. However, advent of the festive and wedding season in India is expected to spruce up demand in the latter half of the year.
In line with the recent movements in gold prices, we suggest three gold-mining stocks to steer clear of at the moment. We have screened gold mining stocks that have a Zacks Rank #5 (Strong Sell) and have witnessed downward estimate revisions over the past few weeks.
The Zacks rank, along with the Expected Surprise Prediction (ESP) (Read: Zacks Earnings ESP: A Better Way to Find Earnings Surprises) helps in predicting the probability of earnings surprises. As per our proven model, a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) to beat earnings estimates.
We particularly caution against stocks with a Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
Golden Star Resources, Ltd. GSS
Toronto, Canada-based Golden Star Resources is a gold mining and exploration company. It owns and operates the Wassa open-pit gold mine, the Wassa underground development project, and a carbon-in-leach processing plant located approximately 35 kilometers from the town of Bogoso in Ghana; and Bogoso gold mining and processing operation located near the town of Bogoso in Ghana.
This stock has delivered a negative one-year-return of 49.03%. The company also holds a negative earnings growth estimate of 33.33% for the second quarter of 2015 and a projected decline of 180% for fiscal; 2015.
The company had delivered a negative earnings surprise of 200% in the last quarter and an average negative earnings surprise of 100% in the past four quarters. Moreover, the Zacks Consensus Estimate for the second quarter and fiscal 2015 has undergone negative revisions over the past 30 days.
Golden Star’s Zacks Rank #5 when combined with a negative ESP of -25.00% makes surprise prediction unlikely. Golden Star is expected to report second-quarter results on Jul 29.
New Gold, Inc. NGD
Headquartered in Vancouver, Canada, New Gold is engaged in acquisition, exploration, development, and operation of mineral properties and primarily explores for gold, silver, and copper deposits. Its operating properties include a 100% interest in the New Afton gold-copper mine in British Columbia, Canada, the Mesquite gold mine in California, the Peak gold-copper mines in New South Wales, Australia; and the Cerro San Pedro gold-silver mine in the state of San Luis Potosí, Mexico.
New Gold has delivered a negative one-year-return of 65.93%. The company’s share price hit a 52-week low of $2.15 on Jul 20. New Gold is currently trading at a P/E of 124.0, at a significant premium to the industry average of 46.0.
The Zacks Consensus estimate for the company has undergone negative revision over the past 60 days. The company holds a negative growth estimate for earnings of 150% for the second quarter of 2015 and negative 80.56% growth estimate for fiscal 2015. The stock hit a 52-week low of $2.26 on Sep 26, 2014.
New Gold’s Zacks Rank #5 when combined with a negative ESP of -100.00% makes surprise prediction unlikely. It is expected to report second-quarter results on Jul 28.
IAMGOLD Corp. IAG
Based in Toronto, Canada, IAMGOLD is engaged in the exploration, development and operation of gold mining properties. It also explores for copper and silver. The company holds interests in four operating gold mines, as well as exploration and development projects located in Africa, South America and Canada.
The stock has delivered a negative one-year-return of 65.21%. The company’s share price hit a 52-week low of $1.34 on Jul 20. The Zacks Consensus estimate has gone down over the past 60 days and projects a decline in earnings of 400% for the second quarter of 2015 and a 346.3% plunge in earnings for fiscal 2015.
IAMGOLD’s Zacks Rank #5 when combined with a negative ESP of -16.67% makes surprise prediction unlikely. It is expected to report second-quarter results on Aug 5.
Bottom Line
Exiting certain underperformers at the right time helps maximize portfolio returns. With uncertainty in gold prices and prospects of a stronger dollar, we believe it will be a prudent move to get rid of these stocks at the moment. Moreover, an expected earnings miss in the next quarter also ascertains the case of eliminating these stocks from one’s portfolio.
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Click to get this free report NEWMONT MINING (NEM): Free Stock Analysis Report KINROSS GOLD (KGC): Free Stock Analysis Report BARRICK GOLD CP (ABX): Free Stock Analysis Report GOLDCORP INC (GG): Free Stock Analysis Report ANGLOGOLD LTD (AU): Free Stock Analysis Report GOLD FIELDS-ADR (GFI): Free Stock Analysis Report YAMANA GOLD INC (AUY): Free Stock Analysis Report IAMGOLD CORP (IAG): Free Stock Analysis Report NEW GOLD INC (NGD): Free Stock Analysis Report ALAMOS GOLD INC (AGI): Free Stock Analysis Report ROYAL GOLD INC (RGLD): Free Stock Analysis Report GOLDEN STAR RES (GSS): Free Stock Analysis Report ELDORADO GOLD (EGO): Free Stock Analysis Report To read this article on Zacks.com click here.