Precious metals, especially gold and silver, have recently enjoyed favorable demand scenarios, as global powers increasingly take measures to strengthen the pace of their economies. We continue to remain bullish on both gold and silver, as we think that China will take monetary easing steps in the near-term to support funding for recently-approved construction projects. Moreover, the upcoming wedding season in India is going to further fuel jewelry demand, especially of gold. In addition, the investment interest in gold has increased over recent weeks, as central banks continue to add to their gold reserves, which is keeping sentiment high despite a recent strengthening of the dollar. We continue to recommend gold miners, especially Yamana Gold Inc. (AUY), Newmont Mining Corp. (NEM), Barrick Gold Corporation (ABX) and Goldcorp Inc. (GG). Silver Wheaton (SLW) remains our favorite silver player, as it does not participate in mining activity itself, but purchases share of different silver mines future silver production through upfront payment.
Is Monetary Stimulus in China likely?
Monetary stimulus measures are being taken across the globe, from the United States to Japan, in an attempt to boost the pace of economic activity worldwide. China has also taken numerous steps in this regard, such as bolstering loans to exporters, and quicker payments of export tax rebates. Previously, the country had lowered bank reserve requirements to support growth, and it recently cut interest rates twice; the country has also recently approved more than $156 billion in infrastructure spending.
However, despite these measures, China's economy has not picked up pace, and is continually showing signs of a slowdown. The recently released Chinese manufacturing survey, released by HSBC Holdings Plc and Markit Economics, showed that the Chinese Purchasing Managers' Index (PMI) rose slightly from 47.6 last month to 47.8 in September. However, since a reading below 50 indicates contraction, the survey highlighted the 11th month of contraction, which raises concerns about the economy.
According to an analyst at Phillip Futures, Lynette Tan, "It's not a very great improvement. It's still contracting, so I still expect some more stimuli from China, which could help gold."
Gold has slipped off its six-and-a-half month peak, as the dollar gains given that investors are currently skeptical about a further rally (prices have already lifted by almost 10% this month). Demand for the commodity has increased manifold after various governments took quantitative easing steps in their respective economies. This is because of its status as a safe haven, given that it is a hedge against inflation.
Tan is expecting gold to break this year's high of ~$1,790 and even touch $1,800; although, she doesn't expect a further hike. "After the next round of stimulus, we probably won't see much action towards the end of the year, so it's likely to hold steady. There's no catalyst for gold to move higher after that," she said.
We continue to remain bullish on gold, as we eye possible monetary stimulus measures by China this year, and the wedding season in India over the next two months, which will lead to a boost in demand.
Demand is also sustained through constant purchases by central banks worldwide. However, with the eurozone's debt crisis returning to the spotlight, the dollar has shown a slight rebound. Still, according to a Hong Kong-based trader, "There aren't many places to go for investors. Buying precious metals seems to be one of the places for them to step out of fiat money. Everyone that can be in gold is in gold now."
Although the upside will now be limited, given that gold has already rallied significantly, we reiterate our recommendation for gold mining equities, especially AUY, NEM, ABX, and GG. These companies' inexpensive valuations and handsome dividend yields are very attractive, while we also remain impressed with their future growth prospects. The companies have strong balance sheets and lucrative liquidity positions, which add to our bullish sentiment.
Yamana Gold remains our favorite gold player, as it has announced an 18% increase in quarterly dividends (on a QoQ basis), and its new mines (Santa Cruz and Ernesto/Pau-a-Pique) will give their first gold output in Q4, and start commercial production by mid-2013.
Barrick is a good option for long-term investors, as its Pueblo Viejo mine will start commercial production in Q4, and the company is focusing on disciplined capital allocation programs. However, we advise near-term investors to stay cautious, and wait for a detailed update on the budget and the schedule of its Pascua-Lama project, which is constantly suffering from inflation and other cost pressures.
NEM has the distinct advantage of its dividend yield being correlated with gold prices. Furthermore, its dividend yield is the highest amongst its peers. Please click here for a detailed investment advice on NEM.
These long positions can be hedged effectively by shorting Market Vectors Gold Miners ETF (GDX).
Forward P/E (1 year)
Share price performance
Dividend Yield (%)
Source: Yahoo Finance
Silver has also fuelled significantly this year, for the same reasons as those outlined above. The metal has a demand as an inflation hedge, however, it is more volatile than gold. Consequently, we do not recommend investing in physical silver. A better way, as we have mentioned previously as well, is to invest in the silver streaming company, Silver Wheaton. Its strong balance sheet, successful growth profile, and the fact that it is not exposed to risks traditionally associated with a mining company, make us prefer it over silver ETF, iShares Silver Trust (SLV).
Platinum has been suffering a supply squeeze, as a result of violent strikes at mines owned by Lonmin Plc (OTCPK:LNMIY) and Anglo American Platinum Limited (the world's largest platinum producer). Almost 20% of the global supply has been affected as a result of mines shutting down in South Africa. This rally in platinum prices came as a direct result of a six-week strike at Lonmin's Marikana mine, Northwest of Johannesburg, in which 46 people were killed. The issue was resolved just last week, with the compromise being that labor wages be increased by as much as 22%.
Anglo American Platinum (also known as Amplats) has warned that it will pursue legal avenues if workers didn't return at its Rustenburg operations. However, the company has not dismissed any workers so far.
Problems in the South African Mining Industry remain unsolved, as is evident from AngloGold Ashanti Limited (AU)'s recent announcement to halt production at all of its South African mines, due to labor strikes. Meanwhile, inflation pressures are adding to the problems of the country's Mining Industry. According to UBS, "The wider issues that the sector has been struggling with remain unresolved. Higher production costs and ever-rising labor costs put further pressure on the company's margins, which in turn put CAPEX and future production at risk."
However, the main concern is the weak demand emanating from Europe, from which platinum derives most of its demand. This is because platinum's prime use is in cleaning car exhausts in diesel vehicles, whose main market is Europe. Consequently, platinum prices have dropped to $1,630 per ounce as of yesterday, from a peak of $1,714.
Consequently, the outlook in the platinum market is bearish, as most consumers have hedged their needs for the upcoming year, and the current inventory level is sufficient in the near-term. However, this sector presents a buying opportunity in the long-term, if the problems in the South African Mining Industry persist.