The beginning of 2016 has been good for gold with the precious metal trending higher and gold mining stocks have also surged. I have written on Newmont Mining(NEM, Financial) and Barrick Gold (ABX, Financial) as two gold mining stocks to remain bullish through 2016. I maintain my view on these two names besides recommending exposure to SPDR Gold Trust (GLD, Financial).
To put things into perspective, the chart below gives the global PMI for the month of January 2016.
It is clear from the chart that global economic activity has been trending lower. While global manufacturing is largely expected to remain weak, it is concerning to see the global services PMI also decline in the last two months.
This gives a clear indication that the global economy is trending lower, and I see the following implications from a monetary perspective:
First, the Fed is unlikely to increase rates in 2016 and if global economic conditions worsen, there can be a potential rate cut toward the second half of 2016.
Second, central banks around the world would be watching economic activity, and expansionary monetary policies will accelerate from one or several central banks to support the economy as well as asset markets.
Both these factors are likely to be positive for gold, and the upside that has been seen in the precious metal in the recent past is due to gold discounting economic concerns and more money printing.
From an investment perspective, investors should consider physical gold as it’s the best investment option. However, I like the above mentioned gold mining companies for a few reasons.
Both Newmont Mining and Barrick Gold have high financial flexibility through noncore asset sales in challenging times for the industry. If gold continues to trend higher, both these companies are likely to accelerate investments.
Both Newmont Mining and Barrick Gold have an attractive all-in-sustaining-cost; with gold trending higher, I expect robust EBITDA margin for these names. Just to put things into perspective, Newmont Mining expects a $350 million increase in operating cash flow for every $100 an ounce increase in gold price.
With these two important factors in consideration, both these stocks will continue to trend higher even after providing stellar returns for year-to-date 2016.
Coming back to the reasons to be bullish on gold, the World Gold Council report indicated that central banks of Russia and China have been aggressive buying gold in the second half of 2015, and this trend is likely to continue as these countries seek to diversify currency reserves amid economic concerns and increasing geopolitical tensions. Demand from central banks is another important reason that will keep the outlook bullish for gold.
Few ETFs are also worth considering in the gold mining space; I like the Market Vectors® Gold Miners ETF (GDX, Financial). For year-to-date 2016, the ETF has returned a stellar 39%. I expect the rally to sustain.
Global economic activity is weak and there is high probability that central banks will unleash another round of easing sometime in 2016. I expect this to be positive for gold and gold miners and my view is that investors can remain invested in the gold theme through 2016. For long-term investors, the next five to 10 years is likely to be positive for gold.
Disclosure: Invested in physical gold.
