Market experts bullish on gold miner stocks

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Investors should consider adding gold miner stocks to their portfolios in the coming months as they continue to benefit from the current low-interest-rate environment and ongoing uncertainties in the market, market experts said.

Przemysław Kwiecień, head of research at X-trade Brokers, told Personal Wealth that the performance of gold miner stocks has been tightly linked to prices of physical gold, which have been outperforming during the Covid-19 pandemic. X-trade Brokers is a European-based brokerage house that allows investors to trade in financial derivatives based on gold miner stocks and exchange-traded funds (ETFs).

"Gold has been one of the winners of the pandemic for one simple reason — low interest rates around the globe, and even negative interest rates in some countries. A low-interest-rate environment makes cash very unattractive to hold on to in your portfolio. Bonds also do not offer adequate protection for inflation," he said.

"Moreover, with central banks [getting] a bit desperate with their fiscal measures, investors are increasingly worried about the sustainability of these policies. [Gold] miners benefit from this monetary policy in two ways: through rising gold prices which result in higher margins, and from declining risk premiums, which force investors into accepting more risks for less reward."

However, Kwiecień said he believes gold miner stocks are currently overvalued, and their prices are unlikely to drop in the near term. He added that temporary gains in the value of the US dollar provide good opportunities for investors to include gold miner stocks in their portfolios.

Ed Egilinsky, managing director of the head of alternatives department at Direxion ETF also believed that gold miner stocks can trend higher over the next few months, driven by the rising physical gold prices. Direxion ETF is a US-based ETF provider that can offer investors exposure to gold miner stocks through their thematic equity ETFs.

"The upcoming US election, along with the uncertainty in the timing of a vaccine for the Covid-19 virus, should provide support for gold prices in the short term," he said.

"However, once we get past the presidential election, gold miner stocks can deviate from physical gold prices if we get a sell-off in the equity markets, as we did in the first quarter of this year (1Q20). In that scenario, physical gold will hold up significantly better than miner stocks."

Egilinsky added that although there is a strong correlation between physical gold prices and gold miner stocks, the rally in the broader equity markets has also helped propel gold miner stocks higher since the end of 1Q20.

He explained that although physical gold has performed well over the same period, it has significantly lagged behind gold miner stocks. This is due to the risk-on environment which favours equities in general, and is further supported by a low-interest-rate environment.

However, Egilinsky warned that gold miner stocks are technically overbought, and near-term declines in physical gold prices and the broader equity markets may potentially push down the prices of miner stocks.

"From a longer-term point of view, gold prices might decline after the pandemic, along with the health of gold miners' balance sheets through different market cycles. If interest rates rise, that could also have an adverse effect on the financial conditions of companies, particularly gold miner stocks that employ a higher degree of leverage," he added.

Joe Foster, portfolio manager of VanEck ETF, expected gold miner stocks to trend higher alongside rising gold prices for the several years to come, as he believed that gold is currently in a secular bull market.

While gold miner stocks have performed well during the Covid-19 crisis, Foster explained that they have historically performed better in past bull markets. Because of this, gold miner stocks remain undervalued and have plenty of room to move higher if gold prices remain strong.

"Gold miners are generating a lot of cash, and some companies have been raising dividends. Strong operating performance through the Covid-19 crisis is also driving the stocks higher. Amongst the junior gold miner companies, encouraging drilling results and project developments have also been driving the share prices higher," he said.

"The current bull market cycle is different from those in the past. Past strategies have focused on production growth, sometimes at great costs. Gold miners are now focused on returns to shareholders. They have reduced debt and operating costs, which put the companies in a position to generate a lot of cash that will enable them to create better returns to shareholders through dividends, stock buy-backs, and possibly special dividends."

Charles Henry Monchau, chief investment officer at the Switzerland-based Flowbank, was optimistic about the outlook for these stocks, as they are currently trading cheaper than the overall market and have been lagging massively behind physical gold prices and the S&P 500 index.

"From 2005 to 2016, gold miners were pretty much always traded at a premium to the S&P 500, but now the miners are trading at a 15% discount," Monchau said.

"In the age of Covid-19, stocks with balance sheets in line with their income statements should arguably trade at a premium to the market. The gold miners' debt-to-EBITDA (earnings before interest, taxes, depreciation and amortisation) is about 75% lower than the overall market's (1.16 vs 4.69), thus making it an attractive option.

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