4th Mar 2024 14:28
(Alliance News) - Gold prices are currently depressed by hawkish sentiment from the US Federal Reserve, according to analysis from Berenberg on Monday, although it argued that "cylicical[ly] low valuations" in gold stocks present an opportunity for investors.
Spot gold prices are down 1.3% over the last three months, hovering around USD2,090 per ounce on Monday afternoon.
Meanwhile, in the year-to-date, the VanEck Gold Miners ETF and the VanEck Junior Gold Miners ETF, which are both exchanged-traded funds based on gold equities, are both down 11% respectively.
Berenberg said this was due to Fed Chair Jerome Powell and the Federal Open Market Committee having taken a more hawkish stance of late on the pace of interest rate cuts in the US, due to recent economic data indicating "stronger-than-expected" economic performance.
"Since the start of 2024, this has generally sent the dollar higher, and gold equities lower. The positive [consumer price inflation print on February 13 was enough to send gold prices back through USD2,000/oz before recovering above that level, helped by weaker data on February 15-16. We are closely watching the next jobs report, scheduled for March 8, with consensus currently standing at a 190,000 gain; compared with January's 353,000 gain, this may feel optimistic," said Berenberg analysts Richard Hatch, William Dalby and Cody Hayden.
"Based on the most recent FOMC minutes, we think that rate hikes in 2024 are likely to be [second half]-weighted as the FOMC digests economic data, with the economy still performing ahead of market expectations despite inflation running ahead of the FOMC's 2% target. Due to this, gold prices have been sluggish."
Berenberg noted that this has resulted in a "fairly severe" gold equities sell-off. Among London-listed stocks in the year-to-date, Centamin PLC is down 6.3%, Endeavour Mining PLC down 24%, Fresnillo PLC down 19%, Hochschild Mining PLC down 8.1%, Resolute Mining Ltd down 14% and Wheaton Precious Metals Corp down 14%.
Pan African Resources PLC was a notable exception, rising 22% in the year-to-date.
"In some cases, such as Centamin and Pan African, the stocks are trading at 12-month forward [enterprise value against earnings before interest, tax, depreciation and amortisation] multiples at or around the lowest level regardless of gold price – ie on the same multiple at USD1,600/oz gold and at USD2,000/oz gold. On a [price against net asset value] basis, the stocks are also depressed, and this is despite most of these businesses being in better financial shape than they have been in the past," said Berenberg analysts.
"This leads us to think that the equities are oversold, particularly if one considers that [the second half of] 2024 could present quite a constructive gold price backdrop."
Despite expecting that depressed valuations represent an opportunity to invest in gold stocks, Berenberg still cautioned on the second half tail risk.
"FOMC commentary indicates that a rate-tightening cycle could start in the US, which ultimately should be supportive for gold prices. Global volatility remains, with wars continuing between Russia and Ukraine, and in Gaza, but the main reason why we are constructive on gold prices is the US presidential election, scheduled for November 5," said Berenberg analysts.
"Republican Donald Trump is the current odds-on favourite to win and depose incumbent Democrat Joe Biden. If Trump is successful, his appointment is likely to raise global risk perceptions, given his more outspoken and aggressive nature, and to put more pressure on the FOMC to cut rates. Indeed, Trump has reportedly already said he would not offer an extension of term to FOMC chair Powell.
"Overall, we think that gold prices remain supported and can move higher in 2024, and that the gold equities are due a rerating."
Berenberg said it thinks "quality names can rerate in the right macro backdrop".
"For large-cap quality, we would look no further than Wheaton Precious Metals, cheap after a recent guidance update. Endeavour Mining is also attractively valued after a [first quarter] sell off; the company looks well placed to rerate post-FY 2023 results in March," said Berenberg analysts.
"In mid-caps, we continue to think Centamin is very cheap with strong catalysts to rerate, as is Hochschild Mining, while Pan African Resources is already on a rerating path with more to come. Resolute Mining shares have sold off and now present attractive value, in our view, with self-help growth at Syama (Mali). We have a Hold rating on Fresnillo, where we think management has more to do to address costs."
By Greg Rosenvinge, Alliance News senior reporter
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Related Shares:
Centamin PLCEndeavour MiningFresnilloHochschildResolute MiningWheaton Prec.Pan African Resources