As I write this column, gold has rallied from US$1,275 an ounce to around US $1,330. Equity markets are falling. And the world is coming to terms with Donald Trump’s remarkable victory in the United States election.
This is a monumental moment in global politics. An event that could change the dynamic of the global economy. Certainly, a larger, more significant event than Britain’s referendum decision in June to leave the European Union.
Trump is the definition of a wild card. Markets hate uncertainty and there will be buckets of it in the next 12 months. That strengthens the case for gold and other safe-haven assets, but investors need to think carefully about adding precious metals exposure to portfolios.
Some gold observers have argued a Trump victory is worth US$200 to the gold price. Even a Clinton victory would have been worth US$100, such is the uncertainty around both candidates. Gold’s immediate gains after the election were smaller, but give it time.
Gold benefits from Trump’s victory in three ways in the next 12 months. The first is market fear. Gold rises when markets go through “risk-off” phases, such as in the last few days when investors, fearful of another Brexit-style event, sold off equities.
ANZ ETFS analysis of 22 US election victories suggests gold historically rallies over the long term when there is a change in the Presidential party. Gold typically experiences a short-term sell-off when there is no change.
Second, the trajectory of US interest-rate rises, and thus the US dollar, has immediately become more clouded with Trump’s victory. My sense is the uncertainty that follows his victory – and the general fear and loathing about the Trump presidency – will weigh on the US economy in the short term and strengthen the doves’ argument for low US interest rates.
Lower-for-longer rates are good for gold. The precious metal historically has a negative correlation with the US dollar; it rises when the greenback falls and vice versa, although the relationship is not always clear-cut.
Trump’s indifference towards the US Federal Reserve is another unknown. If he tries to “politicise” the central bank and damages its independence and credibility, global confidence in the US economy could be damaged and the US dollar could weaken. Again, good for gold.
Third, watch for India and China, key gold-consuming nations, to buy more of the precious metal in coming months. Trump’s Presidency, if one believes his rhetoric in the lead-up to the election, suggests greater security risks and political/economic volatility in Asia if he withdraws US forces from the region (heaven knows what that means for Australia).
Beyond 12 months, a Trump Presidency could be positive for markets. Republicans now control the White House and both houses of Congress, meaning Trump could find support for policies that include big income tax cuts and greater infrastructure spending.
Granted, Trump will not find it easy negotiating his more radical policies with Republican colleagues, especially those who distanced themselves from him during the campaign. But those hoping that Congress will put the shackles on Trump will be disappointed.
What does this mean for gold?
Gold is going higher in the next 12 months, possibly flirting with around US$1,400 – an area of previous resistance on its long-term chart. Gold hit a major low at the end of last year and the precious metal has stronger tailwinds now.
I am becoming bullish on Australian equities after heavy falls this month. Continued short-term weakness in Australian shares is a buying opportunity. Global economic indicators are starting to improve, as are share valuations.
How best to add gold exposure?
I favour two strategies. First, using an Exchange Traded Fund (ETF) over the precious metal. I have nominated the ANZ ETFS Gold ETF a few times for this report in the past 12 months (the ETF is up 14.3 per cent this year to October 31).
I prefer this ETF, bought and sold like a share on ASX, because it is unhedged for currency moves. Trump’s victory is a negative for risk assets such as equities and the Australian dollar. A lower Australian dollar, assuming the Greenback treads water, will add to the ETF’s returns.
The Australian dollar fell by almost 2 cents when a Trump victory seemed likely. The dollar has recovered part of those losses but Trump’s isolationist policies, if acted on, could damage economic growth in Asia and commodities demand, and, by default, weigh on the Australian dollar.
I have argued previously for the Switzer Super Report that the Australian dollar is overvalued. Frustratingly, it has held its ground, even gone a few cents higher, as commodity prices have rebounded from their lows. Perhaps Trump is the handbrake the Australian dollar needs if markets lose more of their appetite for commodity-based currencies and other risk assets.
A lower Australian dollar is good news for Australian gold producers. The $A gold price rallied from $1,302 in mid-June 2013 to $1,816 in July 2015, before easing to $1,691. The Australian dollar’s retreat from parity with the Greenback helped local gold producers.
I also like ETFs over gold because they eliminate equity market and company risks. Unlike gold equities, you gain pure exposure to the precious metal. But gold equities have more appeal after Trump’s victory given the sell-off in Australian shares.
Chart 1: Australian-dollar gold price over five years
Source: Goldprice.org
Which brings me to strategy two: buying ASX-listed gold producers to take advantage of equity market weakness. Newcrest Mining rallied almost 10 per cent on Trump’s victory, but is still down on its 52-week high of $27.20. Evolution Mining, nominated for this report last year as a preferred gold stock, rallied 11 per cent on Trump’s win.
These and other gold stocks that spiked on Trump’s victory will probably lose some steam over the next few days as the global investment community digests the US election result. But the outlook for high-quality Australian gold producers is the best in some years.
I favour Newcrest (NCM). Its first-quarter FY17 production result beat market expectations for gold and copper production. All of its six mines topped market expectations for production and the company’s all-in operating costs were less than most analysts expected. This result impressed because the Telfer and Lihir mines had mill shutdowns during the quarter.
The market has mixed views on Newcrest. Five of 15 analysts who cover it have a buy recommendation, two have a hold, and eight have a sell. Newcrest is trading above most analyst price targets for the stock, suggesting it is overvalued. But the market could be underestimating its improving operational and management performance – and gold’s better outlook after Trump’s win.
Chart 2: Newcrest
Source: Yahoo Finance
Other preferred gold stocks include the well-run Evolution Mining (EVN), which I have covered previously for this report. Gold Road Resources (GOR), included in the Switzer Super Report takeover portfolio in July 2015, is another one to watch.
Gold Road and Evolution are up 85% and 135% respectively over the past 12 months. I’m sticking with both stocks.
Gold Road Resources’ recent 50/50 joint venture with Gold Fields to develop and operate the Gruyere Gold Project in Western Australia is smart. The commissioning and ramp-up of Gruyere could drive the next re-rating for Gold Road and it provides good exposure to a high-quality asset and joint venture with an international gold producer.
Macquarie Equities has an outperform recommendation on Gold Road and values it at $1.02 a share against the latest price of 71 cents. Gold Road lagged the broader rally in gold stocks after Trump’s win, up only a few percent, and it has takeover appeal.
Among higher-risk plays, the West Africa-focused Perseus Mining (PRU) appeals. Perseus owns the Edikan Gold Mine in Ghana, and the less advanced Sissingue Gold Project in Cote d’Ivoire. Perseus rallied 7 per cent on news of Trump’s victory.
Perseus is transitioning from a one-mine, one-country gold producer to a multi-mine, multi-country, mid-tier producer in a famed gold region. Its September production report, better than the market expected, gives much-needed confidence that Perseus is getting on top of production problems that plagued its operations in the past few years.
The high sovereign risk of African gold production makes Perseus one for experienced speculators only. But the one-time market darling has plenty of exposure to the gold price through 6.4 million ounces of measured and indicated mineral resources at Edikan and Sissingue, and 5.2 million ounces at its pre-development Yaoure Project in Cote d’Ivoire.
Like Gold Road, Perseus has takeover appeal for a larger gold producer.
Chart 3: Perseus Mining
Source: Yahoo Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. All prices and analysis at November 9, 2016.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
