Gold Miners See New Momentum As Brexit Vote Lifts Gold Prices
San Francisco (Jun 24) Gold’s rally to its highest point in more than two years is putting renewed focus on the mining sector, with many analysts seeing more potential, despite the sector posting nearly 100% gains since the start of the year.
Overnight, as the U.K. voted in favor of leaving the European Union, Comex August gold futures drove to a high of $1,362.60 an ounce, which is having a significant impact on the mining sector.
The mining sector, especially precious-metals miners, is one of the only bright spots in an equity market Friday that is seeing a sea of red. The S&P 500 Index is down 2.73% on the day, with the Dow Jones Industrial Average down 2.68%. The Market Vectors Gold Miners Exchange-Traded Fund (NYSEARC: GDX) is up 5.63% on the day and the Market Vectors Junior Gold Miners ETF (NYSEARC: GDXJ) is up 4.63% on the day; both precious metal ETFs gapped higher at the open, benefiting from higher gold prices.
Currently GDX is up more than 88% since the start of the year and GDXJ is up a whopping 111%.
Brent Cook, geologist and editor of the popular newsletter Exploration Insights, said that he is not surprised that gold companies are doing well as gold is now on the radar of the general investor community.
Although the sector is overvalued, he added that there is still more potential as investor demand is outweighing supply. He added this supply-and-demand discrepancy will only be exacerbated as gold prices continue to push higher.
“There aren’t enough companies out there to feed the need of investors,” he said. “I think we are going to continue to see higher prices. We have seen the bottom in gold and in the next two, three, five years, [mining] will be a good place to be.”
Not only is investor demand strong, but Cook added that with no major high-quality, companies themselves are facing a dearth of new supply.
“The place to be is in early-stage discovery and even early-stage pre-discovery,” he said.
As the overall gold price goes up and investors continue to shift into the mining sector, Cook explained that companies will soon start to take more chances, buying these early deposits with the hope that it will turn into something bigger.
“Your share prices are way up there, so major mining companies can afford to pay for these deposits with paper. They need to replace the ounces they are producing,” he said. “They aren’t doing that internally so we are going to see a lot more purchase.”
Cook added that even with prices up 111%, he still likes the GDXJ and recommends investors look at creating a basket of early-stage explorers that have the most potential in the current market development.
In a research note Friday, equity analysts at Citigroup said that they are upgrading mining equities to neutral from bearish, with specific interest in precious metals.
“We have run a number of scenarios for the miners and on average the diversified mining companies show more earnings robustness than the pure-play companies; the bright light remains precious companies which are likely to benefit from a rising gold price,” the analysts said in their note.
Equity analysts at BMO Capital Markets are also bullish on the mining sector in the near term and see potential for larger, liquid precious-metals companies as they expect gold prices to push to $1,400 later in the year.