Seeking Alpha

Lower Rates Should Benefit The Gold Miners

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Includes: AEM, FNV, GDX, KL, SBGL
by: Clif Droke
Clif Droke
Long only, momentum, newsletter provider, ETF investing
Summary

The Federal Reserve's looser interest rate policy should boost the gold mining stocks.

Gold stocks with the strongest earnings estimate trends will rise the most.

The internal backdrop for overall mining sector is gradually improving.

Investors have shed some of their risk aversion in the wake of the Fed’s looser monetary policy of late. While this has taken some of the shine away from gold, it has done nothing to mitigate the intermediate-term upside potential for many actively traded gold mining shares. In this report, we’ll review the factors which favor higher prices for the leading gold mining companies in the months ahead, including lower interest rates.

Gold investors were mostly gratified to hear the latest news on the interest rate front. The Federal Reserve on Oct. 30 cut its benchmark interest rate by a quarter percent. This was expected by most investors and the Fed once again accommodated the market’s wishes. Fed President Jerome Powell also indicated in his latest remarks that the central bank may pause its recent series of rate cuts. Barring deterioration in the economic data, the Fed signaled that investors shouldn’t expect much more in the way of monetary policy accommodation for a while.

The Fed funds range is now 1.5% to 1.75% after the third consecutive cut. More importantly, the Fed funds rate is now below – and where it should be in relation to – the U.S. 10-year Treasury bond rate. The following graph shows that the Fed funds rate has finally slipped under the 10-year yield for the first time in several months. When the Fed funds rate rose conspicuously above the Treasury yield, it led to a period of volatility in the equity market due to the tightness of the Fed’s money policy. That should change now that the Fed has significantly loosed its policy.

Source: St. Louis Fed

Many investors believe a looser Fed policy will be bullish for equities, hence creating more competition for gold. It should also be borne in mind, though, that a lower Fed funds rate also increases gold’s appeal for yield-conscious investors due to diminished competition from yielding assets like bonds.

More importantly, the latest series of Fed funds rate cuts – along with the fact that the Fed’s rate is now below the 10-year yield – is potentially good news for gold mining stock investors. While it’s arguable as to how much near-term impact the Fed’s looser monetary policy will have upon the physical gold price, the share prices of companies which mine the metal are in a much better position to benefit from it. Let’s take a look at some of the fundamental and technical reasons for expecting an outperformance in the mining stocks in the coming months.

To begin with, the near-term internal health of the U.S.-listed gold mining shares is as good as it has been so far this autumn. The 4-week rate of change of the new highs and lows among the 50 most actively traded mining shares is on the upswing, as you can see here. Whenever this indicator is rising, it suggests an upward path of least resistance for gold stocks in the aggregate. This is based upon the observation that the new highs and lows are one of the best ways of measuring incremental demand for stocks. When the new highs-lows momentum for the gold shares is rising following a market decline, the implication is that informed investors are behind the buying since small investors tend to shy away from buying after a decline.

Source: NYSE

Meanwhile, the 120-day rate of change in the new highs and lows for the actively traded gold stocks is in excellent conditions right now. This indicator is shown below and is in the best shape it has been in all year. While gold stock prices are less responsive to this indicator on a short-term basis than they are to the above-mentioned 4-week indicator, it’s still encouraging to see the strength in this indicator. It suggests that the intermediate-term (3-6 month) trend for the gold stocks is still up.

Source: NYSE

Let’s now turn our attention to the outlook for some select North American gold mining stocks. As we’ve seen here, the internal profile of the actively traded gold mining stocks is improving by the day. This should especially support the gold mining stocks which are showing the greatest amount of relative price strength versus both the S&P 500 Index (SPX) and the PHLX Gold/Silver Mining Index (XAU). Gold stocks which are in a strong fundamental position are also likely to benefit the most from the rising internal currents within the sector. Let's take a look at a few of them. Please be advised that I'm not formally making buy recommendations for any of the stocks mentioned here. Rather, I intend for these stocks to serve as examples of the types of stocks I expect to outperform once the next sustained rally phase has commenced for the sector.

One of the best performing gold mining stock of the last few months, in relative strength terms, has been the Sibanye-Stillwater Ltd. ADR (SBGL). While the percentage gain in SBGL has been impressive, the stock had recently been testing its 2017 high at the 7.00 level while many other mining stocks were closer to their multi-month lows. A pullback from the stock’s recent breakout above the 7.00 level would be ideal before the next sustained rally to new highs. Due to Stillwater’s relative strength, however, the next confirmed buy signal for the broad gold mining sector will place SBGL high on our list of potential buy candidates.

Sibanye-Stillwater Ltd.Source: BigCharts

Franco-Nevada Corp. (FNV) has remained mostly above its 15-day trend line since confirming its last immediate-term breakout signal back in May. FNV’s daily chart displays the orderly, stair-stepping pattern of a stock in strong hands. FNV has also been one of the top performers of all blue-chip gold miners and can be regarded as an indicator of the overall mining stock outlook. A decisive breakout above the 100.00 level would be a bullish signal for both FNV as well as the broader gold stock market.

Franco-Nevada Corp.Source: BigCharts

Fundamentally, there are a growing number of blue-chip mining companies which display impressive earnings estimate trends. Consider for instance Agnico-Eagle Mines (AEM). Agnico’s quarterly earnings estimate trend is better than that of many large-cap industrial or tech sector shares. Not only that, but the company’s forward earnings trend is accelerating strongly higher. This bodes well for its future share price performance, especially given the bullish intermediate-term technical backdrop for the gold stocks in general.

Source: Nasdaq

Also worth mentioning is the impressively rising trend in Kirkland Lake Gold’s (KL) quarter earnings estimates. KL has been another top relative strength performer for most of 2019. Based on its combined technical and fundamental attributes, it should reclaim its role as a strong performing gold stock once the next short-term breakout signal for the broad gold mining stock sector has been confirmed.

Source: Nasdaq

A combination of strong earnings estimates for precious metals mining companies and a much better interest rate backdrop will combine to boost the appeal of gold mining shares in the coming months. As discussed in the previous report, once we get a confirmed breakout signal for both the gold price and the XAU index, I expect the gold stocks in a position of relative strength to benefit the most. What’s more, rising internal momentum based on the new highs and lows for the 50 most actively traded gold shares is supportive of a bullish outlook. Investors can accordingly maintain intermediate-to-longer-term holdings in gold and gold-tracking funds.

On a strategic note, I’m still waiting for both the gold price and the gold mining stocks to confirm a breakout signal per the rules of my technical trading discipline. Accordingly, I haven’t yet initiated a new short-term trading position in the VanEck Vectors Gold Miners ETF (GDX). GDX is my preferred trading vehicle for the gold mining stocks and the ETF I refer to most frequently in this report. I’m currently in a cash position in my short-term trading portfolio.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GDX 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.