Gold Up on Weaker Greenback & Grexit Worries: What Next?
Gold has recently regained some of its ground, rising above the psychological level of $1200 per ounce as the greenback slipped after the Federal Reserve’s dovish stance on Jun 17. Dollar weakness benefits gold as it boosts the metal's appeal as an alternative asset and makes dollar-priced commodities cheaper for holders of other currencies. Moreover, concerns about the Greek debt crisis also boosted gold.
Gold prices continued to trade higher following a spate of U.S. economic data last Thursday. Even though the May consumer-price index saw its biggest gain since Feb 2013, it was still lower than expected. Consumer prices increased 0.4% in May, below forecasts for a gain of 0.5%. Weekly jobless claims fell to 267,000, at a near 15-year low, lower than the consensus estimate of 276,500.
The recent surge in gold prices moved up the share prices of certain gold miners, like Goldcorp Inc. (GG), Yamana Gold, Inc. (AUY) and Newmont Mining Corporation (NEM).
Let’s take a deeper look at the other price drivers — the classic case of supply and demand:
Global Demand Lags Y/Y: Jewelry Down but ETF Up
As per the World Gold Council, total gold demand dipped 1% in the first quarter to 1,079 tons.
Jewelry demand dropped 3% to 601 tons as higher volumes in India, US and the smaller South-East Asian markets were offset by declines in China, Turkey, Russia and the Middle East. In China, demand for gold jewelry was under pressure due to slowing GDP growth, rallying stock markets and a cautious outlook for gold prices, while demand in the Middle East suffered from domestic unrest. Demand in Turkey dipped due to jump in local prices to near-record levels.
In the technology sector, gold demand was down 3% to 80 tons as sluggish economic conditions and substitution with cheaper materials continues to affect demand. However, the investment sector fared well as demand increased 4% to 279 tons, mainly due to ETF inflows. The first quarter saw ETF turning positive for the first time since the fourth quarter of 2012 at 25.7 tons, benefitting from improved Western investor attitudes toward gold. Total bar and coin demand plunged 10% year over year to 253 tons as previous year’s accumulation created a general reluctance in further buying.
Central banks remained the primary acquirers of gold, purchasing net 119 tons over the quarter. This accumulation of gold reserves continues to be diversification, namely away from the US dollar. Russia retained its appetite for gold, driven by tension and uncertainty for the country. Kazakhstan, Belarus, Malaysia and Mauritius also made sizeable purchases.
Supply Remained Flat Despite Rise in Mine Production
Mine production in the quarter grew 2% to 729 tons. The Oyu Tolgoi mine, which is a joint venture between Turquoise Hill Resources Ltd. (TRQ), a subsidiary of Rio Tinto plc (RIO) and the Mongolian government, contributed 4 tons to the growth. North American mines generated growth of around 9%, a turnaround for the U.S. market which has been witnessing a drop in production for two consecutive years.
Barrick Gold Corporation’s (ABX) Cortez and Goldstrike mines are among the contributors to this growth. Goldcorp’s Cerro Negro mine in Argentina continued to ramp up and added approximately 3 tons to production growth. A number of African mines also contributed to the growth. In Namibia, B2Gold Corp.’s (BTG) Otjikoto project poured first gold in December last year and will continue to show positive year-on-year comparisons as it ramps up. Randgold Resource Limited’s (GOLD) Kibali mine in the Democratic Republic of Congo generated marginal growth.
Recycling of gold dipped 3% year over year to 355 tons due to drying up of supply from European and U.S consumers. Hence, overall gold supply remained flat year over year at 1,089 tons in the quarter as rise in mine production was offset by shrinking volumes of recycling.
Sector Level Earnings Trend
Within the Zacks Industry classification, the gold mining industry falls under the broader Basic Materials sector (one of the 16 Zacks sectors). The sector did not fare well in the first quarter, putting up a 1.8% year-over-year decline in earnings on the scoreboard.
The earnings graph is expected to take a nosedive with 11.8% decline in the second quarter and recover somewhat with a 3.2% drop in the third quarter. The graph is expected to enter the positive territory with 20.3% surge in earnings in the fourth quarter.
Despite the choppiness, the sector will log earnings growth of 2% in 2015 and accelerate to growth of 18.2% in 2016. (For a detailed look at the earnings outlook for this sector and others, please read our Earnings Trends report.)
Industry Ranking & Outlook – Negative
We rank all of the more than 258 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.
The way to align the ranking and outlook from the complete list of Zacks Industry Rank for the 258+ 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 featured in the lowest tier with a Zacks Industry Rank of #177, indicating a negative outlook.
Please note that the Zacks Rank for stocks, which are at the core of our Industry Outlook, has an impressive track record, verified by outside auditors, to foretell stock prices, particularly over the short term (1 to 3 months). The 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.
What’s in Store?
A delay in raising interest rates elevates demand for gold which produces no income but relies on price appreciation to attract investors. Investors also continue to eye developments surrounding talks between Greece and its international creditors. If the Jun 30 deadline for the country’s big payment due to the IMF is not met, Greece may finally have to leave the currency union. Market jitters could strengthen the safe-haven appeal of gold.
Gold prices will get support from retail demand for gold, particularly in India and China as we enter a seasonally stronger second half of the year. Prices rev up as demand remains strong with the Diwali festival in India, and Thanksgiving, Hanukkah, Christmas and New Year's in the U.S. India is currently the world’s top gold consumer and lower prices, easing of import norms, better prospects for economic growth exhibit an encouraging backdrop for gold demand in India. Central bank demand will also support prices as demand from this sector has been remarkably consistent.
Given the dearth of new projects, mine production will slow down in the next couple of years. Lower gold prices from previous years and cost pressures have restricted the ability of gold producers to invest in developing new projects in recent years. This could eventually lead to a supply crunch that would support prices. Expectations of positive earnings growth, which though muted in 2015 is set to accelerate in 2016, makes a good case for the gold mining industry.
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Click to get this free report TURQUOISE HILL (TRQ): Free Stock Analysis Report RIO TINTO-ADR (RIO): Free Stock Analysis Report NEWMONT MINING (NEM): Free Stock Analysis Report RANDGOLD RSRCS (GOLD): Free Stock Analysis Report GOLDCORP INC (GG): Free Stock Analysis Report B2GOLD CORP (BTG): Free Stock Analysis Report YAMANA GOLD INC (AUY): Free Stock Analysis Report BARRICK GOLD CP (ABX): Free Stock Analysis Report To read this article on Zacks.com click here.