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Why Gold Stocks Were on Fire Today

By Maxx Chatsko - Oct 11, 2018 at 4:56PM

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Economic fears are pushing gold prices higher. Struggling gold stocks are following suit.

What happened

Considering that the U.S. stock market has been historically expensive for much of the past year, investors were waiting for even a mild correction. It appears the wait is over. While investors don't know whether or not global markets will continue to shed trillions of dollars in wealth, as has happened in the last 48 hours, they do know of at least one noteworthy bright spot: gold stocks.

Fears over a falling stock market and rising inflation have kicked off a surge in gold prices, which has lifted the perceived fortunes of gold stocks -- many of which have struggled in recent months. Shares of Sibanye-Stillwater (SBSW 4.07%) rose nearly 13% today, followed by Kirkland Lake Gold (KL) and even industry titan Barrick Gold (GOLD 1.24%), which rose as much as 10.9% and 10.2%, respectively. Many other gold miners and gold streamers rose at least 5% today.

Is the move sustainable?

A giant earth hauler.

Image source: Getty Images.

So what

After bottoming out at $1,060 per ounce in August, the spot price of gold soared to $1,222 per ounce as of 3:17 p.m. EDT following today's jump of nearly 3% -- an impressive daily move for the precious metal.

While gold prices are still down about 12% in the last six months, investors are betting that higher prices might be here to stay. That's a direct result of the global sell-off of stocks, as investors dump shares in expensive businesses and those in riskier industries, such as biopharma, and look for less volatile assets. 

Quickly rising gold prices this week are bolstering the fortunes of struggling gold stocks such as Sibanye-Stillwater. It's down 36% since the beginning of the year following concerns over share dilution, acquisitions of minor and debt-ridden producers, and increased uncertainty in the relationship between the mining industry and the South African government. Higher selling prices would make it easier to walk the tightrope of the company's balance sheet and provide flexibility when responding to possible reforms in South Africa.

Gold nuggets on a table.

Image source: Getty Images.

Barrick Gold has also struggled, with shares down 13% since the beginning of 2018, although the gold mining behemoth recently announced promising preliminary production results for the third quarter. Gold production increased from the previous quarter, while management maintained its full-year 2018 production guidance -- something analysts were concerned might be lowered. Higher selling prices, when coupled with lower production costs, higher production volumes, and the pending acquisition of Randgold, would deliver much-needed momentum heading into 2019.

Meanwhile, Kirkland Lake Gold has been one of the few gold stocks to escape the gloom and doom surrounding the mining industry this year. But with industry-leading production growth and cash flow, that's not too surprising. The company expects to announce a whopping 30% year-over-year increase in production volume in the third quarter, which will also be a company record for a three-month period. Higher selling prices would make the gravy train even richer, and possibly accelerate the company's already ambitious acquisition strategy. 

Now what

Whether or not gold is actually a safe haven in a world dominated by a strong U.S. dollar and new geopolitical concerns is a discussion worth having. But that doesn't matter much to gold producers. They just want to sell the stuff at the lowest cost and highest price possible. If gold prices can remain at elevated and healthy levels as a result of lingering economic concerns -- even if stock markets recover soon -- then gold miners will find increased financial flexibility to continue executing on their ongoing strategies.

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Stocks Mentioned

Barrick Gold Corporation Stock Quote
Barrick Gold Corporation
GOLD
$18.78 (1.24%) $0.23
Sibanye Stillwater Limited Stock Quote
Sibanye Stillwater Limited
SBSW
$10.73 (4.07%) $0.42
Kirkland Lake Gold Ltd. Stock Quote
Kirkland Lake Gold Ltd.
KL

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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