Is The Difference In Returns Between Gold And Gold Stocks Significant?

by Trefis Team
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NEM
Newmont Mining
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The year 2017 has seen gold prices increase around 6% year-to-date, yet the stocks of major gold mining companies are trading close to the levels seen at the beginning of the year, as illustrated by the charts shown below.

Gold Prices H1 2017

London Fix Gold Prices, Source: Kitco

NEM Stock Price H1 2017

Newmont Mining Stock Price, Source: Google Finance

ABX Stock Price H1 2017

Barrick Gold Stock Price, Source: Google Finance

In this article, we will try to explain why gold prices and gold stocks have traced seemingly divergent trajectories so far this year and what lies ahead.

Gold Prices

Gold is largely seen as a safe-haven asset from an investment point of view, with investments in the yellow metal largely made to hedge against macroeconomic and geopolitical uncertainty. Moreover, since gold yields only capital gains in terms of returns (with no coupon or interest component), rising interest rates tend to lower the attractiveness of gold as an investment. Gold prices ended the year 2016 at fairly subdued levels in the wake of the U.S. presidential elections held in November and an interest rate hike by the Fed in the middle of December. President Trump’s pro-business agenda drove a rally in the stock markets which lowered the safe-haven investment demand for gold. However, gold prices rose considerably in the first four months of the year as heightened geopolitical risks pertaining to the conflict in the Middle East and uncertainty pertaining to the outcome of the French presidential elections drove the investment demand for gold higher. The upward trajectory of gold prices was interrupted by Fed rate hikes in March and June and Emmanuel Macron’s electoral victory in May.

Going forward, steady economic growth in the U.S. is expected to temper the investment demand for gold, keeping prices subdued. Though a political deadlock in Washington has prevented President Trump from implementing his legislative agenda so far, specifically the infrastructure plan and tax reform, market participants still expect the President to implement at the very least a watered down version of his agenda. The potential implementation of the President’s agenda, which would provide a further boost to economic growth, is certainly a dampener for gold prices. Though potential geopolitical flashpoints such as North Korea could provide some upside to prices, barring any adverse developments, there is not much impetus for gold prices to rise sharply in the near term. This is reflected in our forecast for gold prices, illustrated by the chart shown below.

Gold Stocks

Gold stocks mirrored the gains in gold prices in the early part of the year but have receded since then. Besides a subdued outlook for gold prices going forward, as far as Barrick Gold is concerned, there are certain company-specific factors at play as well. Barrick’s African operations, based in Tanzania, have been negatively impacted by the Tanzanian government’s ban on the exports of unprocessed minerals. [1] Though the company’s production guidance for its African operations remains unaffected so far, if the company is unable to resume exports soon, it could be forced to scale back production levels since there isn’t adequate smelting capacity within Tanzania. While the company is engaged in negotiations with the Tanzanian government in order to resolve the situation, the uncertainty caused by the developments in Africa has weighed on Barrick Gold’s stock price.

Unlike Barrick, Newmont does not have any major company-specific factors weighing on its stock price, which is reflected in the higher earnings multiple attached to Newmont’s stock (Newmont’s stock is currently trading at a forward P/E multiple of 30x as compared to Barrick’s 24x). However, given the subdued outlook for gold prices, the company’s stock price is currently trading at close to the level at the beginning of the year. Though Newmont’s stock has underperformed in terms of returns vis-a-vis gold, the gap between the two in terms of performance should narrow over the rest of the year. Though gold prices have risen 6% year-to-date, they currently average around 1% lower than the average for the full year 2016. Barring unexpected geopolitical developments, gold prices are unlikely to rise sharply in the near term and are certainly expected to average lower than last year, as illustrated by our forecast shown previously. Thus, despite a slight difference in returns since the beginning of the year, the upside for both gold stocks and gold prices remains limited in the near term. One should not read too much into the difference in performance between the two, which itself could narrow over the rest of the year.

Have more questions about Newmont Mining? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Newmont Mining

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Notes:
  1. Barrick Comments on Potential Impact of Tanzania Concentrate Export Ban, Barrick Gold News Release []
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