Gold And Brexit Part 2

| About: SPDR Gold (GLD)

Summary

Gold rallies after Brexit, but gold miners' performance is muted.

Major gold miners may follow the steps of major oil producers.

My top candidate to buy in case gold stays above $1300.

Several days passed since Brexit and now we can assess the impact of British decision to leave the EU on gold (NYSE: GLD) and gold miners (NYSE: GDX). I laid out my initial views on this topic in "Gold And Brexit: Which Stocks To Buy", so you might find it useful to check the preceding article if you haven't seen it already.

Gold

Gold managed to hold above $1300, and that's the major achievement for the shining metal. If gold spends some time above $1300, it will become the next major support line instead of $1200, which will certainly be bullish for gold. Gold is currently driven by sentiment, not fundamental demand, so technical factors which influence the mood of traders might be playing a key role in the coming months.

The strength of the dollar did not interfere materially with the gold rally. However, I believe that a continuation of the dollar rally (in case it happens) might put pressure on gold prices and even trigger a significant correction.

As expected, Brexit was not a one-day event for markets and various commentary from politicians keeps coming. I believe that harsh statements together with counter-attempts to calm things down will continue, which will increase uncertainty and create some demand for safe heaven assets like gold.

Gold miners as a group

GDX posted new highs after Brexit, but the was nothing spectacular in GDX performance. The reason is likely that GDX is up 94% year-to-date, an ultra-strong result for a non-leveraged ETF. Junior gold miners (NYSE: GDXJ) performed worse than GDX after Brexit, which could be explained by the fact that GDXJ is up even more than GDX this year.

I don't think that buying/selling gold miners as a group, through GDX or GDXJ makes sense in the current environment. Unless gold prices stage another serious rally, the tide will not lift all boats and investors will become more selective at current levels.

Major miners

I suspect that major miners may follow the steps of big oil producers like Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX). There are multiple arguments why Exxon Mobil or Chevron are overvalued given current oil prices, but the market demand dictates its own terms. Investors want exposure to oil, but they want to sleep well at night as well. This desire to sleep well at night increases demand for major oil producers' shares and keeps them at elevated levels.

The same process may happen with Barrick Gold (NYSE: ABX), Newmont Mining (NYSE: NEM), Goldcorp (NYSE: GG) and Agnico-Eagle Mines (NYSE: AEM). Gold has been one of the most intriguing stories in the first half of this year, so having gold exposure after Brexit might become a "prerequisite" for fund managers and ordinary investors alike. It's probably too early to tell whether this will actually happen, but I think that it's highly possible.

Second row

In my previous article on the topic, I stated that IAMGOLD (NYSE: IAG) provided more leverage to gold prices among peers like Kinross Gold (NYSE: KGC), Yamana Gold (NYSE: AUY) and Eldorado Gold (NYSE: EGO). So far, it really looks like IAMGOLD has some fuel left in the tank while the reaction of other stocks to Brexit has been muted. I will continue to watch IAMGOLD closely in case gold manages to rally from current levels.

South Africa

Trading action in South African gold miners has been rather disappointing following Brexit news. Only Anglogold Ashanti (NYSE: AU) managed to hold near highs, while Gold Fields (NYSE: GFI), Harmony Gold Mining (NYSE: HMY) and the stock which I watched more closely, Sibanye Gold (NYSE: SBGL) fell from highs reached on Friday.

Perhaps, the increase in gold price is now not enough for sustained upside in gold equities after the major run since the beginning of the year, and the market discounts various problems the South African gold miners face. I believe that this is an interesting development and a thing to monitor in the coming weeks.

Royalty and streaming

Steady but slow upside awaited investors in Silver Wheaton (NYSE: SLW), Royal Gold (NYSE: RGLD) and Franco-Nevada (NYSE: FNV). Shares of streaming companies remain rather expensive due to their scarcity. I reiterate my view that the upside is limited for this group unless gold prices rally significantly. For long-term oriented investors, it's certainly better to wait for a significant pullback.

Bottom line

Brexit did not cause a major rally in gold equities. Gold miners' shares rallied a lot since the beginning of the year and current levels are not suitable for all investors, hence the selling pressure on good news for gold. Nevertheless, if gold manages to stay above $1300, the market will once again turn to gold miners for exposure. My top candidate for this scenario is IAMGOLD.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IAG, SBGL over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.