Unchanged interest rates for an extended period of time increase expectations for a low real yield environment. This renews investors’ interest in gold as the metal starts to become more appealing than bonds and other fixed-income securities.
Unaltered federal funds rates are not the only positive factor for gold, however.
The Trump administration's decision to increase tariffs from 10% to 25% on approximately $200 billion worth of goods made in China may increase inflation as importers pass higher costs on to consumers. Higher inflation will cause investors to revalue gold as a safe-haven investment.
At close on Wednesday, the precious metal was trading around $1,273.80 per troy ounce on the London bullion market and around $1,273.75 per troy ounce on the Comex.
Wednesday’s closing price is still 1.8%, or $23.64 per ounce, below the cumulative average price of $1,297.60 per ounce for 2019. As a result of a number of catalysts, however, the price of gold should rise in the coming weeks.
In order to benefit from rising commodity prices, investors should consider buying shares of publicly traded gold producers who can reward shareholders better than the average player in the mining industry.
One stock that meets this criteria is Alacer Gold Corp. (ALIAF, Financial)(TSX:ASR, Financial).Ă‚ The stock has gained 12% over the past week, 10% over the past month, 61.5% year to date, 51% over the past year and 17% over the past three years through May 22, topping the industry in each period. The VanEck Vectors Junior Gold Miners (GDXJ) exchange-traded fund is the benchmark for the industry.
Wall Street is also positive on the stock as it issued an overweight recommendation rating and an average price target of $4.22 per share. This means analysts expect Alacer Gold will continue to outperform the industry in the coming weeks, producing 45% stock appreciation from the closing price of $2.91 on Wednesday.
The Canadian low-cost intermediate miner holds an 80% interest in the Çöpler Gold mine in Turkey. At the mine, the company is processing the mineral through two producing plants.
In the first quarter, Alacer produced over 89,000 ounces of gold, which, according to a $1,304.24 price per ounce, generated $35 million in unlevered free cash flow. The miner reduced net debt by 12% to $215 million and forecasted production of 320,000 to 380,000 ounces in 2019.
The short-term catalyst is the upgrading of the sulphide plant at Çöpler. Thus, the production will gradually improve, driving up the free cash flow if gold prices continue to be stable.
The stock is not cheap. The chart below shows the closing share price is above the 200-, 100- and 50-day simple moving average lines and 26% off the midpoint of the 52-week range of $1.53 to $3.07. The market capitalization is $848.4 million, the price-book ratio is 1.18 versus the industry median of 1.62 and the enterprise value-Ebitda ratio is 13.99 versus the industry median of 8.71.
The 14-day relative strength index of 66 suggests the stock is neither overbought nor oversold.
Investors should add to their Alacer positions after any significant weakness pulls the stock down.Ă‚
Disclosure: I have no positions in any securities mentioned.
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