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Underperformance Of Gold Equities Is A ‘Clear Buy Signal’ - BMO

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Underperformance Of Gold Equities Is A ‘Clear Buy Signal’ - BMO

(Kitco News) - Gold equities are underperforming strong gold prices, which reveals a “clear buy signal,” according to BMO Capital Markets.

“Gold equities have underperformed the metal and are now trading at early 2016 levels - a clear buy signal that is starting to be noticed,” Andrew Kaip, BMO Capital Markets analyst, said in a note published on Friday.

The underperformance of gold equities is easily noticed when looking at GDX vs. gold, Kaip pointed out.

But, there are emerging signs that gold equities will pick up.

BMO said it uses the premium between the sector implied gold price and spot gold, “which has contracted from the low 20% range through much of 2017 to the low 10% range post the December Fed rate hike.”

“The last time gold equities traded at this low an implied premium to spot gold was prior to the rise in gold prices in 2016 where the premium increased to 30% with gold approaching $1,400/oz,” Kaip wrote.

One of the early signs that gold equities are doing better is increased interest expressed by an uptick in generalist buying.

Some of the gold stocks highlighted in the note included Newmont Mining, Kinross, B2Gold, Endeavour Mining, and Kirkland Lake Gold.

BMO’s outlook for gold prices remains strong due to unwavering investor demand for the yellow metal.

“Gold has outperformed our expectations since the mid-December Fed rate increase. Gold is currently benefiting from a combination of geopolitical and economic tailwinds, most recently comments from Treasury Secretary Mnuchin supporting a weaker USD,” the note said.

“Total known ETF holdings of gold are up 1.4% so far this year, totalling 72.5Moz at the end of January, with inflows relatively steady. This gives us a degree of confidence that a gold price range above $1,300/oz can be sustained for now,” Kaip said.

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