Top 10 ASX gold stocks and the US$1,800/oz gold thesis

Investors continue to dump risk assets at a rapid click.

Overnight, US markets fell precipitously. The S&P500 shed 137.63 points (-4.42%) and the NASDAQ collapsed, falling 414 points (-4.61%).

The world’s most coveted tech stocks couldn’t escape this vicious panic selling: Microsoft -7.05%, Facebook -3.78%, Apple -6.54%, Alphabet (Google) -5.39% and Amazon-4.81%.

Apple now has had over US$200 billion of its market capitalisation wiped away in under a week.

When the ASX 200 opened today, it crashed 228 points (-3.6%) in the first 30-minutes of trade.

Yet as risk assets get dumped, the expectation, at least from one of the world’s leading investment banks is that gold will move higher.

J.P. Morgan yesterday published a piece of research titled Fear and wealth: gold: the haven of last resort.

A dramatic title and a befittingly dramatic prediction: gold could soon hit US$1,800 per ounce – or roughly AUD$2,741 per ounce – at today’s exchange rate.

Analysts from the bank noted that in the last week – as the coronavirus crisis intensifies and global markets tumble – gold has predictably held up: outperforming other perceived haven currencies such as the Yen and Swiss Franc.

Impressively, it also outperformed 10 year bonds from 'all major G10 currencies'.

This outperformance, notes J.P. Morgan ‘underscores the fact that, with rates getting closer to their lower bound, gold looks increasingly like the safest haven.’

With the subsequent conclusion being drawn, that a combination of ‘risks to global growth surrounding the virus together with a continued savings glut, depressed real rates and increased focus on the US election should take the gold price higher by year-end.’

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How much higher will the gold price run?

As a consequence of the above, J.P. Morgan analysts expect gold to hit US$1,700 per ounce in three months, US$1,750 in six and US$1,800 in a year.

Top ASX-listed gold stocks (by market capitalisation)

Overall, higher gold prices and market uncertainty can sometimes help push gold stocks higher. We saw this on Monday: when markets crumbled, ASX-listed gold stocks rallied.

Saracen Mineral climbed 7.3%, Regis Resources rose 4.4%, and Newcrest Mining was up 5%.

Yet this relationship is a precarious one. As Kitco commentator Lobo Tiggre punchily notes:

‘Gold is a safe-haven asset—gold stocks are not.’

Such a fact was well illustrated on Tuesday. Markets continued to drop, and gold stocks fell in step. They also couldn’t be saved from the chaos today: Newcrest fell ~4%, Evolution crumbled near 5% and Regis Resources dropped ~5% – in the first hour of trade.

Even when considering this uncertain relationship; below we outline the top 10 ASX-listed gold stocks – based on market capitalisation.

_{*Share prices and market capitalisation figures correct prior to the market open (28 February). 12-month price target and Ratings data taken from Bloomberg Data.}

Research in focus

Further highlighting the uncertainty of the relationship between gold and gold stocks, a research paper titled Gold Stocks, the Gold Price and Market Timing (2010); by Owain ap Gwilym, Andrew Clare, James Seaton and Stephen Thomas note that:

‘It has generally been accepted that commodity stocks offer a degree of leverage to the price of the commodity that they produce. In an informal survey of gold company managers, Tufano (1998) found that they expected a 1% increase in gold to lead to a 3% to 10% increase in their stock returns.’

Yet this paper concludes that:

‘We have investigated the relationship between gold producing equities and physical gold prices and found, consistent with the evidence of Tufano (1998), that the sensitivity of gold equities to the gold price is not constant.’

Moreover, Jed Graham, in an article written for Investor’s Business Daily, notes that:

‘In general, if you think gold is near a bottom and has room to run, history would say you're better off owning gold stocks than the yellow metal itself.’

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