Treasure Chest: Gold’s Come-Back

This story features EVOLUTION MINING LIMITED, and other companies. For more info SHARE ANALYSIS: EVN

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts.

By Rudi Filapek-Vandyck

Whose Idea Is It?

Analysts at Morgan Stanley

The subject:

The performance of gold bullion, and in extension shares in gold producers listed on the ASX, have been one Great Disappointment for many traders and investors who'd taken up on the old narrative about the precious metal offering protecting against inflation.

Not so when the US Treasury market has to reset from exceptionally low yields during the preceding two years.

But could gold (and gold producers) finally be released from the iron grip imposed by US Treasuries?

Before we attempt to answer that question, first have a look at the chart below.

This chart, which also featured in my presentation at the Australian Gold Conference earlier this year (link to video below) clearly shows the direct relationship between bullion and gold producers throughout different periods of outperformance and underperformance.

In simple terms: when gold is in fashion, shares in gold producers surge to a relative premium, and when gold is not in fashion, shares in gold producers sink to a noticeable discount.

This simple observation easily explains why picking the timing right for the sector can be important: it's the switch from discount to premium that generates outsized returns (and vice versa).

The opposite holds true as well: simply holding gold (through an ETF or otherwise) limits one's losses during the not so great times, but it also won't generate the same magnitude of gains when the investment community looks favourably upon bullion again.

This morning, analysts at Morgan Stanley are advocating the positive thesis for owning gold and gold producers again, on the general forecast the Federal Reserve will slow its pace of monetary tightening, which should also translate into the US dollar Index peaking, then subsiding.

In the words of the analysts, the above could "propel the gold price and allow multiples for gold stocks to expand after a prolonged decline".

More info:

One look at yesterday's price action on the ASX strongly suggests Morgan Stanley's idea has already been leaked to at least some parts of the local investment community.

Take a look at the snapshot of the daily Winners and Losers as published on the FNArena website yesterday. On the left (day's winners) it's obvious the buy gold trade was very much in fashion on the day. If a company is mentioned in the left hand column, there most likely is a link to gold.

If, however, Morgan Stanley's timing proves accurate, the sector's PE multiple re-rating will have a lot further to run.

Morgan Stanley itself has offered the suggestion to play the sector's resurgence through Evolution Mining ((EVN)) -hereby promoted to Preferred Choice on the ASX. The local Big Brother in the sector, Newcrest Mining ((NCM)) is equally rated Overweight (i.e. the equivalent of a Buy elsewhere).

Interestingly, having outperformed the sector up to yesterday, Northern Star ((NST)) has been downgraded to Equal-weight. No mercy is shown for perennial underperformer Regis Resources ((RRL)). Morgan Stanley sticks with its Underweight rating.

Price targets offered are respectively $3.10 for Evolution Mining, $23 for Newcrest Mining, $10.80 for Northern Star and $1.70 for Regis Resources.

Video of my presentation at the Australian Gold Conference earlier in 2022: https://www.youtube.com/watch?v=J7IzgE5eQ0k&t=5s

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