Near-term prospects bright as investors weigh virus's economic and inflationary impact
Most gold miners may be going offline as anti-coronavirus lockdowns and curfews stay in place, but that hasn’t stopped them from outperforming broad equity indexes so far in 2020.
The S&P/TSX’s Global Gold Index, SPTTGD, which tracks producers of gold and related products, has gained about 20% this year, reported Reuters. That includes companies that mine or process gold on a global basis.
That rise comes alongside an over-10% rally in spot gold this year, representing the largest gain among major assets tracked by the media corporation. The virus selloff has been brought major pain to equities and industrial commodities, as shown by the roughly 17% decline in both the MSCI World stocks index and copper prices.
Investors are polarized over whether the coronavirus will lead to a long-term deflationary or inflationary effect, given the lockdowns and trillions of dollars in economic stimulus governments around the world have deployed to tackle the problem. With that ambiguity in mind, investors have flocked to gold as their go-to safe asset.
“That is just a pure margin expansion benefit for [gold miners],” said Ned Naylor-Leyland, who managers a gold and silver fund at London-based Merian Global Investors. In particular, he cited the rising U.S. dollar coupled with the steep plunge in oil prices, which he said account for 30% to 40% of miners’ costs.
Despite an 8.5% drop in first-quarter gold output, Barrick Gold Corporation has said it’s still on track to hit its full-year production targets. Its shares have gained more than 40% this year.
Refinitiv Lipper data show that gold ETFs soaked up US$7 billion of new investor money in March — the most in more than eight years — as bond ETFs and equity ETFs saw outflows. Total holdings in gold-backed ETFs reached 1,975.2 tons, according to Refinitiv, reflecting another record.
“However, analysts have been cutting gold miners’ 2020 profit estimates, albeit marginally when compared with other sectors,” Reuters said.
A poll by the news outlet also revealed broad expectations that spot gold prices would consolidate below recent highs as the dollar’s strength and weak retail consumption neutralize the increase in investor demand.
“Only the investment side and ETF buying is supporting gold, which is offsetting the lower physical demand,” Ronald Leung, chief dealer at Hong Kong-based Lee Cheong Gold Dealers in Hong Kong told Reuters. “But I don’t know how long that can be sustained.”
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