The price of gold just hit a two-week high, and investors are wondering if this is a good time to start a new position in the gold miners after the recent pause in the 2019 rally.
Let’s take a look at the current situation in the gold market and see if Barrick Gold (TSX: ABX)(NYSE: GOLD) deserves to be on your buy list.
Golden days
Gold went on a tear this summer, rising from US$1,300 in late May to US$1,560 at the beginning of September. Profit taking then kicked in, and the yellow metal fell back to $1,500, where it bounced around for roughly two weeks. In recent days, however, a new tailwind has taken gold back to US$1,530 and more gains could be on the way.
The latest shift to the upside comes after the U.S. Federal Reserve cut interest rates for the second time in 2019. The move was expected, and gold initially dipped on concerns that additional cuts might not come as quickly as anticipated. That negative sentiment has since reversed, and gold bulls are back in the driver’s seat.
Lower interest rates tend to be positive for gold, as they reduce the opportunity cost of holding the precious metal, which doesn’t offer any yield.
Gold also gets a boost when traders are searching for a safe haven to protect capital. The ongoing trade battle between the United States and China has increased the risk of a global recession. Gold gave back some of the big gains over the past two weeks as a result of musings from the White House that indicated a deal could be on the horizon.
That sentiment dissipated in the past couple of days after the Chinese trade team abruptly cancelled a visit to American farms after a round of negotiations.
Looking ahead, Brexit is still a wildcard, as is the potential for a military retaliation to the attacks on Saudi Arabia’s oil facilities. The U.S. is pointing the finger at Iran, and any move by the Saudis to respond with force could set off a powder keg in the Middle East.
Is Barrick Gold attractive?
Barrick Gold spent most of the past eight years in the doghouse amid a massive investor revolt.
Why?
During the gold boom from 2003 to 2011, the company splurged on big acquisitions and racked up US$13 billion in debt in a bid to get big for the sake of ego. Once gold prices started to fall from the 2011 high around US$1,900, the share price of Barrick Gold got crushed, falling from $50 to below $10 in 2015.
Management then embarked on an aggressive turnaround strategy that few pundits thought would succeed, but Barrick Gold pulled it off. The company streamlined operations and monetized non-core assets to reduce debt. An uptick in the price of gold helped the process along, and Barrick Gold managed to get its net debt below US$5 billion. The board even raised the dividend.
Late last year, Barrick Gold merged with Randgold Resources to create a global mining giant with five of the top 10 mines on the planet. The timing appears to have been just right, given the strong rally in gold this year.
At the time of writing, Barrick Gold trades at $24.70 per share, down about $2 from the 2019 high it hit in late August.
The price of gold could potentially take a run at the 2011 high sometime next year. In that situation, Barrick Gold starts to become a cash flow machine, and the stock would likely take a run at $40 per share.
Volatility should be expected, and any news of a trade deal between the United States and China could trigger a steep sell-off, so I wouldn’t back up the truck.
However, the medium-term outlook should be positive, and the market could be underestimating how big profits can swell at Barrick Gold on a sustained increase in the gold price.
