Last week on Dec. 2-6, we got several readings on U.S. economic indicators that heighten uncertainty in the financial markets, which I have listed below:
- The U.S. Purchasing Managers Index released by the Institute for Supply Management on Dec. 2, which measures the level of monthly manufacturing activities in the U.S., indicated a contraction of the sector in November as it declined to 48.1, down from 48.3 in October. The index missed market expectations of 49.2 and marked the fourth downturn in the last four months. Lower manufacturing activities were caused by a drop in the acquisition of new orders from manufacturers and by less people employed in the sector.
- The U.S. nonfarm private employment data released by Automatic Data Processing Inc on Dec. 4 was also a big disappointment for investors as it showed that only 67,000 new jobs were added in November compared to 121,000 jobs created in October. It missed market expectations for 140,000 job additions.
- Despite a new business rebound, the first employment increase since August and an exceptional level of activity, the business confidence in the U.S. service sector firms didn’t change from its historical lows in November.
- Regardless of a positive shift in the demand for U.S. manufactured goods (a 0.3% rise in October, up from a 0.8% fall in September), year over year the factory new orders index dropped 0.4%. It is still very far from the average rise of 0.24% computed over the last 27 years.
Uncertainty scares high net worth individuals, who see their wealth at risk and therefore seek for ways to protect it. One way to do so is to buy physical gold, which acts as a safe-haven asset. The positive trend in the price of the gold that we are witnessing signals a increase in demand for the yellow metal.
Year to date, the price of gold is up about 13.6% to $1,466.80 per troy ounce at close on Dec. 11. This amount is approximately 5.7% above its cumulative average price of $1,388.86 per troy ounce for 2019. Long-lasting financial uncertainty will continue to drive the price of the precious metal higher.
U.S. exports worsened in October, edging down by 0.2% from September and suggesting that Trump’s administration may adopt a low U.S. dollar value currency policy to stimulate the export of U.S. goods and services.
A weaker U.S. dollar currency will be an extra positive factor to the gold price due to the existence of a negative relation between the two variables. When the U.S. dollar trades lower, gold usually goes up, and vice versa.
Thus, in order to anticipate the next gold price rally, which will be largely sustained by increased demand from high net worth individuals, investors may want to buy shares of U.S. publicly traded gold producers, taking advantage of their high positive volatility. The market crawls with opportunities where a $1 change in the price of gold determines a high expansion in the share price of the gold mining stock.
Barrick Gold
Amid gold mining stocks, Barrick Gold Corporation (GOLD, Financial) stands out as being particularly well-positioned to take advantage of increasing gold prices. The world’s largest gold producer is a cut above most of its competitors. Year to date, in response to higher commodity prices, Barrick Gold beat VanEck Vectors Gold Miners exchange-traded funds (GDX, Financial), the benchmark for the gold mining industry, by 3%.
The stock has received an overweight recommendation rating from the Wall Street sell-side analysts board, which indicates that the stock is foreseen to continue to outperform the industry within a year. Analyst price targets averaged $20.62, reflecting a 17% upside from Wednesday’s closing share price of $17.62.
Besides higher metal prices, other catalysts to watch in the final quarter of 2019 are attributable gold production and costs as the miner targets to close the entire year hitting the higher limit of the guidance range of 5.1 million to 5.6 million ounces, incurring the lowest possible all-in cost. Barrick Gold expects to support an all-in sustain cost of metal sold in 2019 near the lower limit of the guidance range of $870 to $920 per ounce.
The share price of Barrick Gold rose 24% in the past year through Dec. 11 to trade substantially above the 200-day simple moving average line and slightly over the 100- and 50-day SMA lines.
The stock has a price-book ratio of 1.57, which is close to the industry median of 1.43, and an enterprise value-Ebitda ratio of 7.51, which is below the industry median of 8.47.
The stock has a market capitalization of $31.22 billion and a 52-week range of $11.52 to $20.07.
Barrick Gold will increase its dividend by 25% to 5 cents per common share when it pays its next quarterly dividend on Dec. 16 for a forward dividend yield of 1.17% as of Wednesday.
Disclosure: I have no positions in any security mentioned.
Read more here:
- 3 High-Yield Stocks for the Dividend Investor
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- A Word of Caution for 2 Underperforming Stocks
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