CFRA Research: A Bullish Outlook on Gold

06/01/2020 5:00 am EST

Focus: COMMODITIES

Matthew Miller

Vice President, Equity Research Analyst, CFRA, Equity and Fund Research

CFRA Research sees a very bullish outlook for gold. Amid the Covid-19 pandemic and economic uncertainty, gold has dramatically outperformed other commodities and key asset classes, notes analyst Matthew Miller in the research firm's flagship newsletter, The Outlook.

Gold fundamentals arguably have never been stronger, as the Covid-19 pandemic (and the depressing reality of its economic damage) has led to an unprecedented amount of quantitative easing across the globe.

CFRA thinks the rally in gold has only just begun and gold miners are the best way to play an appreciating gold price, given their leverage to gold price movements.

Equity markets are attempting a strong bounce back from the steep declines in the first quarter, there is a disconnect between the current recovery and he economic reality, and the recent strength in equities could be underestimating the risk of a subsequent outbreak of Covid-19 after economies restart.

The collapse in U.S. employment is unprecedented and many businesses face solvency risk. A large majority of American consumers live paycheck to paycheck and consumption makes up 70% of U.S. GDP.

There is much debate about what the duration of this downturn will be and what the shape of an eventual recovery will look like; the sheer number of public companies that have pulled 2020 guidance underscores the heightened level of economic uncertainty.

Gold is a great hedge against tail risk amid Covid-19. Below we have listed those gold miner stocks we believe carry positive implications at this time. Gold is a great hedge against tail risk amid Covid-19.

Agnico-Eagle Mines (AEM)
Franco-Nevada (FNV)
Barrick Gold (GOLD)
Kinross Gold (K)
Newmont Corporation (NEM)
Royal Gold (RGLD)
Wheaton Precious Metals (WPM)

Unprecedented levels of quantitative easing and negative yields are bullish indicators for gold. The Federal Reserve's balance sheet has seen the fastest and largest expansion over the past two months, reaching a record $6.72 trillion, as of May 6.

The Fed will likely need to do more to stimulate the economy and bond yields will likely continue to head lower, possibly even go negative.

Higher gold prices and stable per-unit operating costs will likely drive meaningful free cash flow growth. When the gold bullion price moves, gold miners generally move in the same direction to the tune of 2x to 3x the price of underlying gold bullion.

The major reason for this leverage to gold prices is the operating leverage that is achieved as a result of relatively stable cost structures.

In our view, gold is the best hedge against economic uncertainty in general and, more specifically, against fiscal deficit, negative-yielding bonds, fiat currency debasement, and potential inflation.

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