Equity Research Report Release
Monday, October 7, 2019
Minerals Industry Report
Metals & Mining Third Quarter Review and Outlook
Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.
Refer to end of report for Analyst Certification & Disclosures
- Mining stocks underperformed the broader market. Mining companies (as measured by the XME) declined 10.3% during the September quarter versus a 1.2% increase in the S&P 500 Index. Year-to-date through September 30, the XME was down 2.8%, while the S&P 500 Index appreciated 18.7%. During the third quarter, the price of gold increased 3.4%, while silver increased 11.6%. We note the Van Eck Vectors Gold Miners ETF (GDX) was up 4.5% during the third quarter and 26.7% year-to-date through September 30. The gold/silver ratio was 86.0x at the close of the quarter; down from 92.0x at the end of the second quarter.
- Precious metals outlook leans on monetary policy and macroeconomic factors. In our view, monetary policy, geopolitical risk and trade, along with concerns about global economic growth and recession fears in the U.S., will drive movements in gold for the remainder of the year. Underscoring concerns about economic growth, an accommodating posture by the U.S. Federal Reserve and other Central Banks may strengthen gold’s appeal.
- Base metals linked to economic growth expectations. With respect to base metals, issues around trade and economic growth will continue to influence demand expectations.
- Mining stocks offer diversification benefits. In our view, mining stocks are an attractive way to gain exposure to metals given their leverage to strengthening metals prices. Precious metals equities may provide a hedge against volatility in the equity markets and offer diversification benefits.
Mining companies (as measured by the XME) declined 10.3% during the September quarter versus a 1.2% increase in the S&P 500 Index. Year-to-date through September 30, the XME was down 2.8%, while the S&P 500 Index appreciated 18.7%. During the third quarter, the price of gold increased 3.4%, while silver increased 11.6%. Year-to-date through September 30, gold and silver were up 12.2% and 7.6%, respectively. Futures suggest gold above $1,500 an ounce in 2020, with silver prices in the upper - $17 range. We note the Van Eck Vectors Gold Miners ETF (GDX) was up 4.5% during the third quarter and 26.7% year-to-date through September 30. The gold/silver ratio was 86.0x at the close of the quarter; down from 92.0x at the end of the second quarter. We still maintain our view that silver is undervalued relative to gold and thus could represent greater long-term price appreciation potential.
Among base metals, futures prices for copper, lead and zinc fell 5.2%, 6.7% and 9.4% during the third quarter, while nickel increased 42.8%. Year to date through September 30, nickel, lead and zinc futures prices were up 73.3%, 8.0% and 3.2%, respectively, while copper declined 2.5%. What can investors expect for the remainder of 2019?
While gold and silver were up in July and August, both metals declined in September as the U.S. dollar held its strength against other currencies and comments from the Federal Reserve Chairman provided some uncertainty about future rate cuts. In our view, trade tensions have likely contributed to the strength of the U.S. dollar relative to other currencies given tariffs' expected negative impact on global economic growth and the relative strength of the U.S. economy. Following an announced quarter point cut to the fed funds rate in September, the Federal Reserve Chairman stated, “the future course of monetary policy will depend on how the economy evolves and what developments imply for the economic outlook and risks to the outlook”. He added that “we have often said that policy is not on a preset course, and that is certainly the case today.”
We note that on October 1, the Institute of Supply Management released a weaker than expected manufacturing report that, among other things, indicated that the September Purchasing Managers Index declined 1.3% relative to August. The report led some to speculate the Fed could lower rates again at its October meeting. Further accommodation by the Fed could send the dollar lower which would be supportive of precious metals although the fact that other central banks are lowering rates could mute or offset the impact on a relative basis versus other currencies.
In our view, monetary policy, geopolitical risk and trade, along with concerns about global economic growth and recession fears in the U.S., will most likely drive movements in gold for the remainder of the year. Underscoring concerns about economic growth, a more dovish posture by the U.S. Federal Reserve and other Central Banks may strengthen gold’s appeal. This is especially true given that real interest rates are negative in some countries. The possibility that more debt will yield negative real rates has implications for the values of global currency thus promoting precious metals’ role as a store of value.
With respect to base metals, issues around trade and economic growth will continue to influence demand expectations. Supply concerns about nickel have buoyed prices and metals with exposure to electric vehicle car batteries will continue to garner attention as investors evaluate supply and demand forecasts.
In our view, mining stocks are an attractive way to gain exposure to metals given their leverage to strengthening metals prices. Precious metals equities may provide a hedge against volatility in the equity markets and offer diversification benefits.
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ANALYST CREDENTIALS, PROFESSIONAL DESIGNATIONS, AND EXPERIENCE
Senior Equity Analyst focusing on Basic Materials & Mining. 20 years of experience in equity research. BA in Business Administration from Westminster College. MBA with a Finance concentration from the University of Missouri. MA in International Affairs from Washington University in St. Louis.
Named WSJ 'Best on the Street' Analyst and Forbes/StarMine's "Best Brokerage Analyst.”
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Report ID: 11091