Loading ...Take Profits in Gold, Says Analyst. That’s Great News for Everyone. — Barrons.com
The time has come to take profits in gold-mining stocks and put the money to work in companies producing metals that would benefit from a recovering economy, according to Barclays.
“Gold is already in record territory in most currencies,” wrote analyst Matthew Murphy in a Thursday research report downgrading Newmont (NEM) and Barrick Gold (GOLD) to Hold from the equivalent of Buy. “Outside the realm of fiat, it is also in record territory versus oil and other commodities.”
(Fiat currencies are paper money, backed by nothing more than the promise of governments.)
It now takes more than 60 barrels of oil to purchase a single ounce of gold, compared with fewer than 30 barrels in early February. Gold has gotten pricey, relatively speaking, while oil has plunged.
The downgrades aren’t roiling the stocks, though. Newmont was up 2.2% in midday trading, while Barrick gained 1.5%. The Dow Jones Industrial Average and S&P 500 were both lower after more weak jobs numbers came out at 8:30 a.m. Eastern time.
Another 5.2 million Americans filed initial claims for unemployment benefits last week, bringing the total number to roughly 22 million over the past month. Economic turmoil can fuel gains in gold stocks, given that the metal is a haven investment. It tends to rise when the economy is slowing and interest rates are falling, as they are now.
Barclays’s suggestion to rotate out of gold is another sign that things are slowly returning to normal despite the economic damage from the Covid-19 pandemic.
“The fact that the gold story looks so good right now suggests to us that it probably can’t get much better. We see downside to gold prices as 2020 progresses,” Murphy wrote. “The outlook for industrial commodities looks fairly lackluster with supply cuts needed. However, here the story can get better.”
Better means, implicitly, that he sees the potential for the global economy to turn up. And a better economy is bad for gold. The yellow metal has few industrial uses, while producers of metals such as copper, lead, and zinc, struggling with reduced demand because of the coronavirus outbreak, stand to benefit from a recovery.
Copper, for instance, is down 17% year to date and 30% below its 52-week high. Gold, on the other hand, is up about 14% year to date, near its 52-week high at more than $1,700 a troy ounce.
(A troy ounce is a little heavier than a regular ounce, at about 14.6 to the pound.)
Gold’s gains have propelled gold-mining stocks higher. The VanEck Vectors Gold Miner ETF (GDX) is up about 6% year to date, while the S&P 500 and Dow Jones Industrial Average are down by double-digit percentages. Both the ETF and gold hit 52-week highs this week.
Newmont and Barrick have done better than other miners, rising 37% and 33% year to date, respectively. The stocks trade for about 30 times estimated per-share earnings for 2020.
Those are high multiples, but gold investors know that whether prices of the metal are rising or falling is more important than absolute valuation levels for miners’ stocks. Right now, gold is on a tear, but it could turn around as fear diminishes and the rest of the economy revs up.