Low energy prices and weaker local currencies versus the USD, improve the profitability of silver and gold stocks in Mexico, Australia and Canada.
The best medicine for market reactions to COVID-19’s spread and official responses lies in precious metals, much as in 2008, according to PI Financial’s head of mining research, analyst Chris Thompson, and his colleagues.
Based in Vancouver, Mr. Thompson joined the PI Financial team in 2018 as a precious metals analyst. However, his experience as a mineral specialist extends back much farther and deeper. Mr. Thompson worked as a mining analyst at Raymond James Financial and Haywood Securities previously. The analyst also received an undergraduate and two graduate degrees in mining-related disciplines from the University of the Witwatersrand (more commonly known as Wits) in Johannesburg, South Africa. He is a registered professional geoscientist in British Columbia.
Turning back to his market expertise, Mr. Thompson explains: “The S&P 500 lost roughly 26 per cent of its value during a 19-day period in the largest sell-off since the 2008 financial crisis.” As of early April, it sat roughly 26 per cent below its mid-February record high, although it has rallied somewhat since.
Gold, silver volatility reminiscent of 2008
Meanwhile, the analyst adds: “Gold and silver prices have been volatile. We’ve seen the price of gold break daily records (as on March 23). In contrast, silver’s performance has been gut-wrenching, dropping to a multi-year, roughly US$12-an-ounce low (also in March), reflective more of the metal trading as an industrial metal like copper than a precious metal like gold.”
Mr. Thompson says he and his colleagues found that current circumstances echo what happened during the 2008 global financial crisis.
“Casting our minds back about 12 years, in early September 2008, the S&P 500 had corrected by around 20 per cent from highs reached in mid-2007. The price of gold also traded about 20 per cent lower than its July 2008 highs of about US$975 an ounce and mining-focused equities were weathering the fallout caused by market uncertainty and weakening metals prices.”
The analyst recalls: “Many were wondering why gold and precious metals-focused equities were failing to act as hedges against economic uncertainty brought about by the subprime mortgage crisis and onset of the global financial crisis.”
“However, the tables turned in early December 2008 with the beginning of a significant rise in the price of gold, which saw the metal more than double in price over the next three years, taking precious metals-focused equities for a ride, chalking up significant gains.”
The strength of the rally was evident in a roughly 200 per cent gain for the NYSE Arca Gold Miners Index over that period compared to a roughly 60 per cent gain on the S&P 500.
Volatility will present buying opportunities
Even though markets made up some of their losses in April, Mr. Thompson and his colleagues say they expect more volatility ahead.
“Underpinned by a massive US federal government intervention (consisting of open-ended quantitative easing, or QE), a much bigger intervention than what we saw in the 2008 global financial crisis, we expect a similar response from gold and then gold-focused equities today.
“In the near-term, we expect continued price volatility caused by US dollar strength in the short term and the need for liquidity as investors navigate through market volatility caused by COVID-19 and economic uncertainty. As such, we see the emergence of buying opportunities for quality names,” says the analyst.
Mr. Thompson also points to other factors working in favour of precious metals miners, such as low energy prices, which have reduced diesel costs at open-pit mines. “Weaker local currencies versus the US dollar improve the profitability of producers operating in countries such as Mexico, Australia and Canada. This is a gold-friendly backdrop and we believe that now is a good time to sharpen the pencil.” He urges investors who share PI’s optimism about gold and silver stocks to maintain “core positions in quality names” and to take advantage of any short-term opportunities due to “valuation dislocations” and possible upcoming catalysts, plus changing market sentiment.
2 gold stocks and a silver miner are ‘best buys’
Mr. Thompson’s “best buy” selections among gold miners are B2Gold Corp. (TSX—BTO) and K92 Mining Inc. (TSXV—KNT). For silver, he points to MAG Silver Corp. (TSX—MAG) at a price of around $12 a share.
“We like B2Gold for free cash flow growth and highlight K92 for an attractive combination of production growth and exploration upside,” he says. “We also highlight MAG at current levels for near-term development exposure to silver.”
Looking ahead, the analyst says 2020 second-quarter results will be more relevant than first-quarter numbers, along with the financial health of companies as they manage the economic effects of work stoppages and other COVID-related policies.
This is an edited version of an article that was originally published for subscribers in the May 22, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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