Gold's shine rubs off on mining stocks
Singapore (Mar 28) Mining stocks around the world have struck gold since the start of 2016, thanks to the spike in the price of the yellow metal amid volatile markets and concerns about the global economy.
Led by a 17 per cent jump in gold prices year to date, shares of the world’s biggest gold producers Barrick Gold and Newmont Mining soared 83.7 and 41.1 per cent, respectively, on the New York Stock Exchange.
In the Asia-Pacific, miners in Australia have performed the best in the year so far, with top gainers such as Newcrest Mining and Northern Star Resources up more than 20 per cent each.
China, which has the second-most listings of gold stocks in the region, saw its top miner Zhongjin Gold Corp. rise 6.98 per cent since the year began.
In Singapore, Catalist-listed CNMC Goldmine Holdings and Wilton Resources Corp outperformed the downbeat market to chalk up gains of 11.1 per cent and 17.2 per cent, respectively. Malaysia-based Anchor Resources, however, has been an anomaly, with its shares down nearly 50 per cent since making its debut on the junior board on Mar 18.
Meanwhile, one of the most popular gold exchange-traded funds (ETFs), the Market Vectors Gold Miners Exchange-Traded Fund (GDX), advanced more than 30 per cent so far this year.
Analysts that Channel NewsAsia spoke to are not surprised, noting that share prices of mining companies tend to move in tandem with the price of the commodity they extract.
“Since the start of the year, mining companies have enjoyed a decent rally,” said Margaret Yang, market analyst at CMC Markets Singapore. “With higher gold prices translating into higher revenue, share prices of mining companies tend to have a high correlation with the price of gold.”
WILL THE RALLY LAST?
Moving ahead, the performance of these mining shares will remain hinged on the direction of gold prices, experts said.
As of Monday’s (Mar 28) Asian trade, spot gold dropped to its weakest in a month at US$1,214.16 an ounce, pressured by a firmer dollar following hawkish comments from US Federal Reserve officials that signalled the next US interest-rate hike could come as soon as next month.
However, in the longer run, analysts expect gold prices to remain northbound amid encouraging factors such as market uncertainty underpinning safe-haven demand and growth in Asia’s major gold markets, namely China and India. Most importantly, the Fed will likely go slow with policy tightening thereby slowing the appreciation of the US dollar, said a report by State Street Global Advisors (SSGA) dated Mar 23.
Even if the Fed decides to hike rates next month, the price of the yellow metal could still see support around the levels of US$1,092 and US$1,180, according to Kelvin Wong, the chief technical strategist for Asia at spread betting firm City Index.
“With these being key support levels, any weakness brought about by an April rate hike will be temporary.”
Instead, a bigger risk for stocks lies in the form of a China-inspired market crash as concerns over stalling growth in the world’s second-biggest economy and the Chinese yuan persist, said Mr Wong.
“If China wants to achieve its growth target range, it has to boost its exports and one way to do that is via another one-off currency devaluation,” the Singapore-based strategist told Channel NewsAsia. “The offshore yuan has been creeping up recently against the US dollar and if it retests the highs set earlier this year, it could create a negative feedback loop into the market about whether China will weaken the yuan again.”
TIME TO ENTER THE MARKET?
As such, City Index’s Mr Wong reckons gold mining stocks to be favorable options for investors with a 3- to 6-month timeline. Beyond that, the sector’s performance could be hard to call, he said.
“Compared to other sectors such as biotechology, the valuations of gold miners are indeed very cheap. However, this rally is a tactical one, meaning it’s largely driven by risk aversion. Does this mean the start of a bull market? I doubt so because of subdued economic growth globally which could weigh on demand,” he said.
There are market watchers who are more bullish. Barry Dawes from Paradigm Securities told Channel NewsAsia that “any weakness is a good time to buy”, particularly Australian gold stocks.
“The gold market is resuming a very long-term rising market with high price targets, and gold stocks will be major beneficiaries,” said the head of resources at Paradigm Securities, who has an overweight call on Australia’s Northern Star, Evolution Mining and Tribune Resources.