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Gold Miners Will Beat Most Sectors In Q4

Includes: AEM, FCX, GDX, KGC, PAAS
by: Clif Droke

Gold mining companies are positioned for blow-out Q4 earnings.

Leading mining stocks will easily top S&P 500 earnings consensus.

Gold stock investors will continue to benefit from this earnings strength.

With another reporting season soon approaching, many investors are wondering if gold stocks will be exempt from Wall Street's low expectations for Q3 earnings. The fear among some participants is that the diminished fear factor, combined with the Street's diminished expectations for corporate earnings in the latest quarter, will inflict damage to the leading mining shares in October. But as I'll show in this report, the fundamental outlook is quite favorable for the gold miners in the coming quarter.

In the month to date, we've seen a notable decline in the level of fear among market participants. This decline in the "fear factor" can be attributed to the improved sentiment over the U.S.-China trade war, as both sides have lately expressed a willingness to defuse the tariff dispute. Moreover, improved flows into beaten-down segments of the U.S. equity market and out of safe havens have been witnessed in the last three weeks. This has naturally caused gold investors to worry that gold's fear component may be weakening.

Despite these fears, though, the fundamental outlook for the mining stocks is actually quite bullish. In fact, mining companies are among the few industry groups which currently have a favorable fourth quarter earnings outlook. The consensus expectation for S&P 500 companies for Q3 is for a 3.8% earnings decline, according to FactSet data.

What's even more remarkable for the gold miners is that the industry is set to show an incredible amount of relative strength compared to the overall basic materials sector. According to FactSet:

The Materials sector is expected to report the third highest (year-over-year) earnings decline of all eleven sectors at -7.6%. At the industry level, two of the four industries in this sector are projected to report a decline in earnings: Metals & Mining (-48%) and Containers & Packaging (-15%)."

What's more, Freeport-McMoRan (FCX), which is both a gold and a copper producer, is expected to be one of the largest contributors to the anticipated decline in earnings for the sector. This is attributable more to Freeport's enormous copper mining exposure than to its much smaller gold mining component. By contrast, however, most blue-chip gold producers are expected by analysts to drastically outperform the other industries within the materials sector.

Consider for instance that major North American gold producer Agnico Eagle Mines (AEM) has seen its earnings estimates rise significantly in the last few quarters. The graph below highlights the extent to which Agnico's earnings are expected to grow through the fourth quarter of this year. This rising trend in AEM's earnings estimates is one of the strongest in the materials sector and one that companies in most other S&P sectors should be envious of right now.

Source: Nasdaq

Another consideration is the impressive trend in the quarterly earnings and revenue estimates for Kinross Gold Corp. (KGC), a leading Canadian-based gold and silver mining company. Kinross, which is a component of the PHLX Gold/Silver Index (XAU) along with Agnico Eagle, has seen a dramatic increase in its forward earnings trend since the comparable year-ago period. The positive expectations among analysts for the company's continued earnings growth will help fuel the long-term bull market for KGC shares which kicked off last fall. As long as KGC's earnings trend is rising, investors are justified in maintaining a bullish stance toward this company's shares.

Source: Nasdaq

Yet another consideration is to be found in the silver mining space. Canadian blue-chip silver miner Pan American Silver (PAAS) is also an XAU index component and, like the abovementioned gold miners, has a favorable trend in its projected earnings through the fourth quarter and also into 2020. Pan America's earnings estimate trend is shown below, and the graph speaks for itself. The powerful rebound in Pan America's earnings expectations since earlier this year reflects the improved outlook for silver. Demand for the white metal is riding the coattails not only of gold's impressive 2019 performance, but also of other white precious metals with industrial applications - most notably palladium.

Source: Nasdaq

As we've seen here, the fundamental basis for a fourth quarter bull market in precious metals mining stocks can be established by the projected earnings trends for several leading gold and silver mining companies. On a short-term basis, it's worth noting that the benchmark XAU index is still near its high for the year despite its recent pullback. On a technical note, moreover, the XAU has closed two days higher above its 15-day moving average as of Sept. 23. This sends a preliminary immediate-term bottom signal per the rules of my trading discipline as discussed in the previous report. As long as the XAU index closes above the 94.60 level on Sept. 24, I'll have a confirmed immediate-term bottom for the XAU. This in turn would justify increasing near-term exposure to individual mining stocks, including the mining stock ETF mentioned below.

PHLX Gold/Silver Index Source: BigCharts

A final consideration for the Q4 outlook for the mining stocks is the intermediate-term (3-6 month) momentum indicator for the gold mining shares. My favorite measure of internal momentum for the gold stocks is the 120-day rate of change in the new highs and lows of the 50 most actively traded U.S.-listed gold stocks. As long as this indicator (below) remains above its rising trend line, a bullish intermediate-term posture is still warranted for the blue-chip gold miners.

Source: NYSE

Although gold and the mining shares have shown some weakness in September, there are indications that the coming weeks and months will see a revival in interest in the precious metals sector. The strong earnings expectations for the leading gold and silver mining companies is a major fundamental reason for expecting continued strength within the industry. From a technical perspective, a reversal of the downward momentum of the net new highs in the actively traded mining shares also potentially sets the stage for a gold and gold stock short-covering rally early in the fourth quarter. And while gold's immediate-term trend is still slightly unsettled, its longer-term trend is still bullish. Investors can therefore maintain longer-term investment positions in the yellow metal.

On a strategic note, the VanEck Vectors Gold Miners ETF (GDX) has signaled a preliminary bottom based on the rules of my technical trading discipline. A 2-day higher close above the 15-day moving average in GDX suggests the gold mining ETF is bottoming on an immediate-term (1-4 week) basis. If GDX closes above the 28.69 level on Sept. 24, I'll move to an immediate-term buy for this ETF once again with an aim toward using the 27.80 level as the initial stop-loss on an intraday basis for this trading position.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.