The American economy is slowng down and the banking system, which is a very important indicator of the status of the health of the economy, provided a meaningful signal that sustains this view.
Last week, nine of the largest banks in the United States published their financial results for full fiscal 2019 that showed credit and capital raised for large industrial and commercial companies as a total fell by more than $300 billion during the year.
Even though this aggregate data is still not complete, it can already be considered a meaningful indicator as it derives from financial institutions that together cover 70% of the 100 largest U.S. bank holding companies ranked by total assets.
Among the bank majors that released financial results last week were JPMorgan Chase & Co. (JPM, Financial), Wells Fargo & Co. (WFC, Financial), Citigroup Inc. (C, Financial), Bank of America Corp. (BAC, Financial), The Goldman Sachs Group Inc. (GS, Financial) and Morgan Stanley (MS, Financial).
The decline in large business financing means that large corporations decreased their investments in 2019 because they expect lower consumer spending on goods and services in the years to come. It doesn't make any sense for them to allocate more capital to hit that production level to only remain unabsorbed, creating an expensive surplus inventory which would weigh down the balance sheet in subsequent years.
So, expansion is decelerating, which puts more pressure on the Federal Reserve to continue implementing easy credit policies through additional interest rate cuts in the attempt to elongate the current phase of the business cycle as much as possible.
A low-yielding environment is a breeding ground for gold investors because it makes the precious metal more appealing than fixed-income securities such as bonds. But gold is also expected to win the battle against U.S.-listed companies as stocks will start losing momentum as the economic slowdown progresses.
The next gold bull market will also gather strength from the implementation of ad hoc monetary policies from Chinese authorities and European Central Bank. The Chinese economy still needs a decisive boost to rebound from its 6.1% growth in 2019, the slowest pace in the past 29 years, though still within the government's target. The economy of the eurozone is in the mud with France and Germany showing unequivocal signs of stagnation. Germany, the economically stronger and leading country in the EU, closed 2019 with its gross domestic product growing by only 0.6%, which was a sharp drop of 90 basis points compared to 2018 and of 190 basis points compared to 2017.
In addition to the need for central bank interventions, slowing down, struggling and stagnant economies worldwide also increase a financial market uncertainty, which is perceived by high net worth individuals as a threat to the value of their wealth. Against this threat, high net worth individuals take precautions by increasing their holdings in safe-haven assets such as gold. This will push the price of the commodity higher.
Finally, we cannot forget the demand and supply determinants of the price of the bullion on the market. The demand for gold investments will grow more than enough to offset a possible reduction in the consumption of gold jewelry due to the higher price per gram.
Moreover, increased demand for gold may exceed the supply of gold in 2020 and possibly in 2021, creating deficits. The bushfires in Australia may have caused interruptions of mining activities at several sites in New South Wales and Queensland as well, where large and intermediate producers possess mineral interests. Australia is the second-largest producer of the yellow metal in the world with 310,000 kilograms, or about 10 million troy ounces of gold, mined in 2018.
Eventual deficits in gold supply and demand balances will act as a further catalyst to the price of the yellow metal.
As a result, gold has a high chance of hitting $1,650 per troy ounce in the first half of the year, which will mark a hefty 6% growth from $1,557.60 per ounce at close on Friday.
To take advantage of the next rally in the gold price and make unbelievable capital gains out of it, the metal cannot be seen just as a safe-haven asset, but it must be used as a speculative instrument. This strategy can be pursued by purchasing shares of U.S. publicly traded mining companies that stand out of the crowd for their high volatility related to changes in the price of the commodity.
Investors who really want to reach the ceiling should prefer those gold stocks whose share prices increase more than proportionally for each $1 jump in the price of gold per ounce. It is not difficult to localize these stocks as they tend to outperform the mining industry by large margins when the underlying commodity is uptrending.
This was the case for Sibanye-Stillwater (SBGL, Financial), Eldorado Gold Corp. (EGO, Financial) and DRDGOLD Ltd. (DRD, Financial), whose share prices rose 287%, 173% and 202%, topping the VanEck Vectors Gold Miners ETF (GDX) by 245%, 131%, and 162%, in the past year. The bullion rose by 20.3%. The ETF is the benchmark for the gold mining industry.
Let’s dig in a bit in each of these three gold operators.
Sibanye-Stillwater also produces other metals such as palladium, platinum and rhodium from its assets that are located in South Africa and the U.S.
Gold operations in South Africa contributed to the profit line of the company with a yearly production of 775,000 to 805,000 ounces at an all-in sustaining cost of $1,350 to $1,450 an ounce, U.S. platinum group metals output yields about 615,000 ounces at an all-in sustaining cost of $755. And South African platinum group metals production adds around 1 million to 1.1 million ounces at an AISC of $922 to $974 per ounce.
The stock closed at $11.23 on Friday for a market capitalization of $6.32 billion. The 52-week range is $2.67 to $11.2. The price-book ratio is 0.97 versus the industry median of 1.52 and the enterprise value-Ebitda ratio is -25.65 versus the industry median of 8.84.
Wall Street sell-side analysts issued three recommendation ratings in January: two buys and one hold. The average target price to hit within a year is $12.30.
Eldorado Gold is a Canadian gold mining company that is extracting the precious metal from its mineral assets in Turkey, Canada and Greece. The miner is also engaged in the exploration of properties and the development of mineral resources that it holds in Greece, the Balkans and Brazil. Currently, Eldorado mines between 395,000 and 420,000 ounces of gold per year.
The stock traded at $7.26 per share at close on Friday for a market capitalization of $1.15 billion. The 52-week range is $2.52 to $10.09. The price-book ratio is 0.34 versus the industry median of 1.52 and the enterprise value-Ebitda ratio is 6.12 versus the industry median of 8.84. The stock received 14 recommendation ratings in January, of which three are for a buy approach, eight are for holding the stock and three foresee Eldorado underperforming throughout 2020. The average target price is $9.43.
DRDGOLD is a South African mining company that is engaged in the recovery of gold from the treatment of surface tailings that are now located in the central and western Witwatersrand basin in the South African province of Gauteng. The company also holds other activities, including exploration and smelting. The operator will fund the initial stage development of the second phase of the West Rand tailings treatment project with proceeds generated from the sale to Sibanye-Stillwater of an additional 12% interest in its own stock. Once the project is completed, DRDGOLD should be able to feed the gold market supply side with 200,000 ounces every year.
Shares of DRDGOLD traded at around $5.94 at close on Friday, determining a market capitalization of $408.07 million. The stock has a 52-week range of $1.64 to $6.10, a price-book ratio of 2.27 versus the industry median of 1.52 and an enterprise value-Ebitda ratio of 16.21 compared to the industry median of 8.84. In January, the stock got one buy recommendation rating and another sell recommendation rating for a mean rating of hold and an average target share price of $9.13.
Disclosure: I have no positions in any securities mentioned.
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