The price of gold dipped after hotter-than-expected inflation data. It looks ready to rebound and extend its two-year rally, which would likely send gold mining stocks upward.
March’s consumer price index rose 3.5% from one year ago, a tick above estimates and higher than February’s result. In theory, gold should rally because investors buy it as a hedge against inflation. It was down a few tenths of a percentage point to $2,360 an ounce just after the inflation numbers were released on Wednesday, but it was’t falling as much as the major stock indexes, which were solidly in the red.
That’s not the only good news. Gold’s mild dip on Wednesday is a drop in the bucket compared with its rally in the past few years.
Gold futures are up 20% from mid-April 2022 and close to a record high. Investors are hedging their stock market bets over concerns that economic growth will decelerate, as high interest rates could dent the economy and stocks. Plus, geopolitical tensions are brewing, and if one of them flares up, stocks could get hit.
As a commodity, gold has broken above price levels where sellers had previously knocked it lower in recent years. Now, there’s tons of buying interest, and it looks as if the price can remain elevated for a while.
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Going forward, “gold settles into a likely higher range,” writes Michael Hsueh, foreign exchange and commodities strategist at Deutsche Bank.
That could easily lift gold mining stocks, which haven’t yet rallied on the back of higher gold prices.
The
exchange-traded fund has dropped 16% since mid-April 2022. The main driver is that analysts’ expectations for 2024 earnings per share have also dropped 16% since mid-April 2022, even as the price of the commodity has been rising, according to FactSet.
Rising costs have hit profits for gold mining companies.
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for example, is the VanEck fund’s largest holding and has seen analysts lift estimates for the cost of wages, exploration, and even interest expense. While revenue estimates are up in the past couple of years, profit margin and EPS forecasts are down.
It’s exactly these margin issues—combined with the hot price of the commodity—that make the stocks now look attractive. “With gold prices projected to go higher (a move towards $3,000 is not out of the question)…we believe this group should not be overlooked—offering an excellent risk/reward proposition,” writes Rosenberg Research’s David Rosenberg.
The longer gold prices remain elevated, the more likely analysts are to lift revenue estimates for gold companies, which they haven’t done in the past few months. Meanwhile, miners are likely to see more moderate costs going forward, helping to ease the pressure on margins.
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Analysts expect $300 million in employee compensation expense for Newmont this year, up only about $1 million from last year, an expense that is expected to remain the same next year. Exploration expense is also expected to remain flat next year.
Newmont’s earnings per share are expected to gain 27% annually over the next two years—and, of course, that forecast could prove to be too low.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com