Equity Research Report Release
Tuesday, March 24, 2020
Minerals Industry Report
What Is Going on With Gold?
Mark Reichman, Senior Research Analyst, Noble Capital Markets, Inc.
Refer to end of report for Analyst Certification & Disclosures
- Year-to-date gold returns have been lackluster. Year-to-date through March 23, the gold futures price increased 3.0% from $1,529.30 per ounce at year-end 2019 to finish at $1,575.55. During the same period, the Van Eck Vectors Gold Miners ETF (GDX) and Junior Gold Miners ETF (GDXJ) were down 25.1% and 35.9%, respectively, while the S&P 500 index was down 30.8%. On March 9, gold reached a high of $1,704.30 before reaching a low of $1,450.90 on March 16.
- Institutional investors seek liquidity. While gold had performed reasonably well up until the recent market meltdown, the recent weakness in the gold price has been attributed to institutional investors selling positions to raise cash, deleverage and/or to offset other losses. This seems supported by March data from the Commodity Futures Trading Commission. Interestingly, physical demand for gold has increased. Total U.S. Mint gold sales in March 2020 increased to 120,500 ounces compared with 7,000 ounces in February and 60,000 ounces in January.
- Deficits, debt and interest rates. In our view, a combination of rising U.S. government deficits, debt and lower interest rates are supportive of gold prices. Investors typically buy gold as a store of value and with interest rates expected to remain low for the foreseeable future and negative-yielding debt in some countries, investors may increase their exposure to precious metals. Additionally, while stimulus is required to mitigate the coronavirus’ negative economic impact, it could lead to inflationary pressures down the road which are generally supportive of gold prices.
- Outlook for gold prices remains favorable. While gold prices and precious metal mining equities have not escaped volatility, we think the outlook for gold prices and precious metals equities remain favorable. While cash is king now, we believe institutional interest in gold may increase as dislocations in the markets stabilize and both retail and institutional investors seek exposure to gold for diversification.
Despite a Rough Start, Outlook for Gold Prices Remains Constructive
Year-to-date through March 23, the gold futures price increased 3.0% from $1,529.30 per ounce at year-end 2019 to finish at $1,575.55. During the same period, the Van Eck Vectors Gold Miners ETF (GDX) and Junior Gold Miners ETF (GDXJ) were down 25.1% and 35.9%, respectively, while the S&P 500 index was down 30.8%. On March 9, gold reached a high of $1,704.30 before reaching a low of $1,450.90 on March 16.
While Institutional Traders Seek Liquidity, Retail Demand for Physical Bullion is Strengthening
While gold had performed reasonably well up until the recent market meltdown, the recent weakness in the gold price has been attributed to institutional investors selling positions to raise cash, deleverage and/or to offset other losses. This seems supported by March data from the Commodity Futures Trading Commission. Interestingly, physical demand for gold has increased. Total U.S. Mint gold sales in March 2020 increased to 120,500 ounces compared with 7,000 ounces in February and 60,000 ounces in January. In 2019, gold sales amounted to 65,000 ounces in January, 13,000 ounces in February and 11,500 ounces in March.
Rising Deficits, Debt and Lower for Longer Interest Rates
In our view, a combination of rising U.S. government deficits, debt and lower for longer interest rates are supportive of gold prices. Investors typically buy gold as a store of value and with interest rates expected to remain low for the foreseeable future and negative-yielding debt in some countries, investors may increase their exposure to precious metals. Additionally, while stimulus is required to mitigate the coronavirusâ€™ negative impact on global economies, it could lead to inflationary pressures down the road.
As of March 20, the U.S. governmentâ€™s public debt approximated $23.5 trillion. According to the U.S. Treasury Department, the deficit amounted to $624.5 million through February of fiscal year 2020, compared to $544.2 million during the prior year period. Recall the governmentâ€™s fiscal year begins in October. Increasing government deficits and debt could act as a drag on economic growth, support lower interest rates and weaken the U.S. dollar. To mitigate the economic impact of the coronavirus, Congress continues to hammer out a $2 trillion stimulus bill.
On March 23, the Federal Reserve Open Market Committee announced plans to undertake open market operations as necessary to maintain the federal funds rate in a target range of 0 to Â¼ percent. The Fed will use its â€œfull range of authorities to provide powerful support for the flow of credit to American families and businesses.â€? These include purchasing Treasury securities and agency mortgage-backed securities, establishing new programs to provide up to $300 billion in new financing to support the flow of credit to businesses and consumers, expanding money market mutual fund liquidity and commercial paper funding facilities to facilitate credit to municipalities and a potential Main Street Business Lending Program to support lending to eligible small-and-medium sized businesses.
While gold prices and precious metal mining equities have not escaped volatility, we think the outlook for gold prices and precious metals equities remain constructive. While cash is king now, we believe institutional interest in gold may increase as dislocations in the markets stabilize and both retail and institutional investors begin to focus on gold's favorable long-term fundamental drivers and seek exposure to gold for diversification. In our opinion, mining stocks may be an attractive way to gain exposure to precious metals given the disproportionate percentage impact higher commodity prices may have on a companyâ€™s bottom line and valuation for a given percentage increase in the commodity itself. While the virus may have varying degrees of impact on mining operations, any near-term disruption to production would be supportive of gold prices. In our view, the fallout from the coronavirus has only intensified many of the factors that are already supportive of gold prices, including lower interest rates, worries about global economic growth and increased government spending.
All statements or opinions contained herein that include the words "we", "us", or "our" are solely the responsibility of Noble Capital Markets, Inc.("Noble") and do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on its own appraisal of the implications and risks of such decision.
This publication is intended for information purposes only and shall not constitute an offer to buy/sell or the solicitation of an offer to buy/sell any security mentioned in this report, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. This publication and all information, comments, statements or opinions contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice. Past performance is not indicative of future results. Noble accepts no liability for loss arising from the use of the material in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to Noble. This report is not to be relied upon as a substitute for the exercising of independent judgement. Noble may have published, and may in the future publish, other research reports that are inconsistent with, and reach different conclusions from, the information provided in this report. Noble is under no obligation to bring to the attention of any recipient of this report, any past or future reports. Investors should only consider this report as single factor in making an investment decision.
This publication is confidential for the information of the addressee only and may not be reproduced in whole or in part, copies circulated, or discussed to another party, without the written consent of Noble Capital Markets, Inc. ("Noble"). Noble seeks to update its research as appropriate, but may be unable to do so based upon various regulatory constraints. Research reports are not published at regular intervals; publication times and dates are based upon the analyst's judgement. Noble professionals including traders, salespeople and investment bankers may provide written or oral market commentary, or discuss trading strategies to Noble clients and the Noble proprietary trading desk that reflect opinions that are contrary to the opinions expressed in this research report.
The majority of companies that Noble follows are emerging growth companies. Securities in these companies involve a higher degree of risk and more volatility than the securities of more established companies. The securities discussed in Noble research reports may not be suitable for some investors and as such, investors must take extra care and make their own determination of the appropriateness of an investment based upon risk tolerance, investment objectives and financial status.
Company Specific Disclosures
The following disclosures relate to relationships between Noble and the company (the "Company") covered by the Noble Research Division and referred to in this research report.
Noble is not a market maker in any of the companies mentioned in this report. Noble intends to seek compensation for investment banking services and non-investment banking services (securities and non-securities related) with any or all of the companies mentioned in this report within the next 3 months
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.”
FINRA licenses 7, 24, 63, 87
This report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate for any recipient particular investment objectives, financial situation or particular needs. Prior to making any investment decision, recipients should assess, or seek advice from their advisors, on whether any relevant part of this report is appropriate to their individual circumstances. If a recipient was referred to Noble Capital Markets, Inc. by an investment advisor, that advisor may receive a benefit in respect of
transactions effected on the recipients behalf, details of which will be available on request in regard to a transaction that involves a personalized securities recommendation. Additional risks associated with the security mentioned in this report that might impede achievement of the target can be found in its initial report issued by Noble Capital Markets, Inc.. This report may not be reproduced, distributed or published for any purpose unless authorized by Noble Capital Markets, Inc..
RESEARCH ANALYST CERTIFICATION
Independence Of View
All views expressed in this report accurately reflect my personal views about the subject securities or issuers.
Receipt of Compensation
No part of my compensation was, is, or will be directly or indirectly related to any specific recommendations or views expressed in the public
appearance and/or research report.
Ownership and Material Conflicts of Interest
Neither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.\
|NOBLE RATINGS DEFINITIONS
||% OF SECURITIES COVERED
||% IB CLIENTS
|Outperform: potential return is >15% above the current price
|Market Perform: potential return is -15% to 15% of the current price
|Underperform: potential return is >15% below the current price
NOTE: On August 20, 2018, Noble Capital Markets, Inc. changed the terminology of its ratings (as shown above) from "Buy" to "Outperform", from "Hold" to "Market Perform" and from "Sell" to "Underperform." The percentage relationships, as compared to current price (definitions), have remained the same. Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure information mentioned herein, should contact Noble Capital Markets, Inc. by mail or phone.
Noble Capital Markets, Inc.
225 NE Mizner Blvd. Suite 150
Boca Raton, FL 33432
Noble Capital Markets, Inc. is a FINRA (Financial Industry Regulatory Authority) registered broker/dealer.
Noble Capital Markets, Inc. is an MSRB (Municipal Securities Rulemaking Board) registered broker/dealer.
Member - SIPC (Securities Investor Protection Corporation)
Report ID: 11342