Uncertainty surrounding the outcome of the US election next month is driving volatility on the stock market and pushing up the gold price. Gold mining stocks have followed the metal higher in 2020, as sales prices increase their profit margins, even though the Covid-19 pandemic has disrupted production in some regions.
Is now the right time to buy gold mining stocks? Is there still room for further gains ahead of the election?
Moreover, you can scroll down for a video in which Capital.com’s chief market strategist, David Jones, looks at how to set up a trading position in these stocks based on technical analysis.
What has been happening to gold mining stocks so far in 2020?
The gold price hit a record high of $2,069 per ounce in August on a combination of US dollar weakness and global economic uncertainty during the pandemic, in turn, lifting the share prices of gold mining companies. Inflows into exchange-traded funds (ETFs) that follow gold mining stocks have reached all-time highs, reflecting investor interest in getting a piece of the action and finding out what gold stocks to invest in.
The metal has since pulled back to the $1,900 per ounce level. But is that just creating an opportunity for investors to buy into the top gold stocks at a bargain price?
With the US election just ahead, further volatility is likely. The event could drive investors to safe havens like gold and urge many analysts to revise their gold stock predictions.
Canada-based gold and silver mining company Kinross Gold (KGC) has operations in the Americas, West Africa, and Russia. It produced 2.5 million ounces of gold in 2019 and said in a September update that it expects production to steadily increase by 20 per cent to 2.9 million ounces, while falling production costs and capital expenditure will drive strong free cash flow.
Trade Kinross Gold – KGC CFD
The stock has lost some momentum, but it has been stronger than some of the other gold mining stocks’ performance. It has climbed by as much as 110 per cent so far this year, hitting a seven-year high of $10 per share in September. There is strong support at $7.50-$8 per share and a short-term price target above $10 per share.
Kirkland Lake Gold
Although investors in Canada-based Kirkland Lake Gold (KL) have seen a positive return in 2020 and the company is targeting a doubling of production, it has not been one of the best-performing gold mining stocks year-to-date.
The stock is up by 15 per cent since the start of the year, while gold has gained 25 per cent. In a similar pattern to other gold stocks, Kirkland has fallen out of its upward trend. The RSI has dipped to oversold territory, indicating the stock could be a buy with a tight stop-loss at $44 per share.
Canada-based Barrick Gold (GOLD) is a gold and copper mining company with operations in 13 countries. Legendary investor Warren Buffett made headlines in August by taking a stake in the company, having previously dismissed gold as an asset that does not pay interest or dividends.
Barrick reported first-half production of 2.4 million ounces of gold, on track to meet its full-year guidance of 4.6-5 million ounces, so the company has experienced little disruption to its gold production during lockdowns related to the Covid-19 pandemic.
The share price climbed from around $18.50 at the start of the year to as much as $30 in September. The stock has since fallen below the upward trend line, pulling back to $27 per share in early October in line with the retreat in the gold price from the August high.
Falling out of the technical trend does not necessarily indicate the trend is over, but the price could rise at a slower pace. At $26 per share, investors could buy the stock with a relatively tight stop loss in place. The relative strength index (RSI) is oversold, suggesting the stock could recover and run back up to $31 per share. Only if the price falls below $26 per share could the stock see a deeper sell-off towards the June lows around $23 per share.
VanEck Vectors Gold Miners ETF (GDX)
Rather than an individual stock, the GDX is a basket of the best gold mining stocks that aims to replicate the performance of the New York Stock Exchange (NYSE) gold miners index. The advantage of investing in an ETF is that it spreads the risk across stocks. Investors miss out on outsized gains from the stocks that outperform, but limits losses from those that decline.
The GDX is a good proxy for the gold price chart. Gold stocks analysis shows that like the gold price it has fallen out of the uptrend, dropping from $44.50 per share in August to $38 in September, but if the gold price moves higher into the end of the year the ETF will follow. There is strong support at $36 per share and the price has been making higher lows in the past three weeks to return to the $41 per share level.
The aggressive trade is to buy shares in the ETF now looking for a run up to $46 share, while a cautious trade would be to wait for the correction to end before buying.
In the video below, David Jones, Capital.com’s chief market strategist, looks at gold miners vs gold performance and suggests potential trades on the stocks.
Analyst outlook: how will the gold market fare before and after the election?
Analysts expect the gold market to remain volatile for the remainder of the year as investors react to the US election and its outcome, which will, in turn, provide direction for traders looking to invest in gold stock.
Citibank analysts said in a recent note: “Occasional liquidation squeezes, drawdowns, and profit-taking activity for gold seem likely in a high volatility market environment.”
According to analysts at TD Securities, “election and policy uncertainty will certainly keep markets on edge and volatility elevated in the coming weeks before the US election, but once the storm passes, policy action can set the stage for strong commodity markets in 2021.”
The TD analysts explained: “Massive government spending will be required for years in order to repair the economy in the aftermath of the Covid-19 shutdowns, no matter who controls the Presidency or Congress. The resulting record debt and deficits, monetisation and the Fed’s ultra-low interest rate policy across the yield curve all imply that gold should see a sustained rally, once the new government starts operating in the early months of 2021.”
“The US central bank’s focus on full employment and suggestions that inflation may be allowed to move above the 2 per cent target, implies that the resulting lower real interest rates and weaker USD will be important factors assisting gold in its move to new records.”
Wondering how to invest in gold stocks to not miss out on the rising market opportunities? One of the ways to take a position on the metal miners shares is through contracts for difference (CFDs) at Capital.com.
Trading CFDs gives you the opportunity to try to profit from both negative and positive market fluctuations. Therefore, depending on whether you have a bullish or bearish view of the gold stock forecast, you can either hold a long position, speculating that the share price will rise, or a short position, speculating that the price will fall.
However, note that CFDs are a leveraged product. Therefore profits, as well as losses, are magnified.
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