Gold miners are up 83% in USD since the bottom in January as gold had its best quarter in three decades driven by the Federal Reserve lowering their rate forecast on the backdrop of a weaker global economy.
Our negative view on gold and gold miners is driven by macro fundamentals that are turning for the better as the USD as weakened enough to stabilise the global economy. China exports for March were up 12% (year-over-year), showing signs that China’s economy is improving. With the Dollar index around $95, the headwinds are fading providing a breathing space for emerging markets.
We forecast the Fed to raise rates at least two times. Higher USD rates will be the predominant driver of lower gold price and subsequently lower share prices of gold miners.
Despite the recent bull market in gold miners, the industry group is still trading at 12-month forward P/E ratio of 30.2 on top of elevated debt levels. The net debt to EBITDA is currently 6.2 – significantly above healthy levels.
Unless gold prices stabilise at current levels the industry will still experience downward pressure. We believe the valuation of gold miners is completely disconnected from the harsh reality of potential credit crunch in the industry as USD rates go higher and gold prices going lower.
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Source: Saxo Bank
Management and risk description
Key risks include a weaker USD adding tailwind to gold. Further slowdowns in China and thje potential for a Brexit scenario on June 23 could extend gold higher. Also watch gold hoarding in China due to credit squeeze.
Entry: sell at market.
Stop: trailing stop; stop price set at $26.03 (volatility based) with a step size of $0.31.
Time horizon: six months.
— Edited by Michael McKenna
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Non-independent investment research disclaimer applies. Read more