Gold prices have seen significant volatility year to date. After trading around $1,140 per ounce recently, gold has bounced back sharply and trades at $1,277 per ounce.
I want to mention at the onset that I am also bullish on gold from a five- to 10-year investment horizon. Gold will trend higher during this period. The factors that will support a medium-term rally for gold are largely the factors that will also support the long-term bull market.
Geopolitical tensions
When Donald Trump assumed presidential power, there was an expectation that Russian President Vladimir Putin would work with Trump to resolve the crisis in Syria. Since the recent chemical attacks by the Bashar al-Assad regime and the subsequent action by the U.S., the rift between the U.S. and Russia seems to have increased.
In other regions, there are ongoing worries related to North Korea and the South China Sea. I don’t see any major de-escalation in geopolitical tensions, and this is likely to translate into higher demand for gold as investors seek refuge in hard money and relatively safe assets.
Weak GDP outlook
The Fed has increased interest rates since 2016, but there are still doubts of healthy economic growth on a sustained basis.
Just to put things into perspective, the Federal Reserve Bank of Atlanta (GDP Now estimate) projects first-quarter 2017 GDP growth at 0.6%. This is down from an earlier estimate of 1.2%. If this holds true, I don’t see any rate hike in the near to medium term. On the contrary, there might be measures to revive growth if weakness sustains.
I see this as bullish for gold, and I must mention here that expansionary monetary policies are continuing in other parts of the world. The key point is that there is ample liquidity in the economic system, and this excess liquidity can move rapidly from one asset class to another (depending on economic data).
Equities at all-time highs
U.S. equity markets are trading near all-time-highs, and the sentiment is bullish for several markets globally. Valuations look stretched, and a 10% to 15% correction from current levels is likely.
While it’s impossible to predict the timeline for correction, there are reasons to be cautious. Stretched valuations, relatively sluggish GDP growth and geopolitical tensions can drag markets down.
In any event of steep market correction, I see movement of funds from risky asset class to risk-free asset classes. I do see higher demand for gold and Treasurys in the foreseeable future.
Investment opportunities
Exposure to physical gold is the best way to benefit from a gold bull market.
I see gold mining stocks as the second-best investment opportunity, and there are several quality names in the mining industry. If I had to choose one stock, Newmont Mining (NEM, Financial) would be the stock to consider.
The reasons to be bullish on Newmont Mining are as follows:
- In the last six months, Newmont Mining has been largely sideways, and I see this as a good opportunity to accumulate the stock. I also consider current levels as a zone of strong support from a technical perspective.
- Newmont Mining has an attractive all-in sustaining cost (AISC). The AISC was $933 per ounce in fiscal 2015 and $912 per ounce in fiscal 2016. As gold trends higher, I expect strong EBITDA margin.
- The company reported free cash flow of $277 million in fiscal 2015 and $784 million in fiscal 2016. With low AISC, I expect FCF generation in fiscal 2017 and beyond. This improves the company’s financial flexibility.
- The company has attractive projects lined up that can potentially reduce AISC further in 2018-2020. If sentiments do remain bullish for gold, Newmont Mining is likely to report strong cash flow and significant higher dividends.
Based on these factors, Newmont Mining is worth considering at current levels for medium to long term. In addition, I must mention here that Barrick Gold (ABX, Financial) is also an interesting investment option, but I prefer Newmont Mining over Barrick Gold.
Conclusion
The long-term bull market for gold is far from over and I consider current levels as very appealing for investors willing to hold the precious metal for the next three to five years.
There are several positive triggers for gold that will continue to support it as higher levels and the precious metal can be an outperforming asset class in the next few years.
Disclosure: No positions in the stocks discussed.
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