RING - An Expected Downtrend In Gold Suggests Potential Decline For RING

2023-04-12 05:23:54 ET

Summary

• Gold has performed very well in recent months amid fears of a collapse in the banking system but could turn bearish again.
• Fears of a financial crisis are easing, while the continued rise in rates to curb inflation is expected to put downward pressure on gold prices, which are currently high.
• Expected falling gold prices over upcoming months in combination with higher inflation and expensive raw material procurement could negatively impact the performance of publicly traded gold mining and exploration companies.
• Because iShares MSCI Global Gold Miners ETF invests in publicly traded gold stocks, its shares are not poised for improved performance. Then why keep them in the portfolio when cash could be freed up for other investments?

According to this analysis, shares of the iShares MSCI Global Gold Miners ETF (RING) could potentially trade lower on an expected shift to bearish sentiment for gold and some other unfavorable factors.

For this reason, investors should consider a Sell rating on this asset.

How the Price of Gold Develops

Gold has been performing very well for about a month, more or less since the collapse of two regional banks, Silicon Valley Bank and Signature Bank (SBNY). These financial services companies were forced to shut down due to liquidity problems, raising concerns among investors about the stability of the entire American banking system.

Amid concerns about the impact on portfolio values, the precious metal has increased its price per ounce in financial markets as it performs the function of protecting investors' wealth.

The chart of Investing.com below shows bullish sentiment for the precious metal as evidenced by the uptrend in gold futures - 23rd June (GCM3).

Since the bankruptcy of the two US regional banks on or about March 8, gold futures are up 10.73%, outperforming the stock market, which is represented by the S&P 500 futures index (US500).

As a result of this bullish sentiment, gold is now trading at around $2,015 an ounce, one of the highest prices in history and well above the following trends. The 200-day simple moving average is $1,797.01, the 100-day moving average is $1,875.23 and the 50-day simple moving average is $1,904.45.

The Next Gold Price Trend and Its Underlying Factors

Now investors are wondering if gold will continue to rise and reach higher levels, perhaps doubling the all-time high of $2,074.88 an ounce set in August 2020, or if it would be better to capitalize on current highs before a possible downturn occurs.

The bullish phase of the gold price cycle should be coming to an end, assuming this was fueled by concerns about the health of the credit system. Now that people seem to have overcome the panic that drove them to frantically scour the internet for news about the potential impact on their banks, the trigger for the gold price surge no longer exists and will therefore fade .

Instead, the factors that should cause the yellow metal to turn bearish are largely due to a continuation of central bank tightening to further fuel the disinflationary process.

Higher interest rates are not good for gold, but they are good for bonds that pay a coupon at fixed maturities. In the financial markets, the demand for gold thus pays for the precious metal's failure to generate returns for its owner, who prefers to focus on fixed-income securities that benefit from interest rate increases.

As for the situation in the US, the Federal Reserve [Fed] is expected to hike interest rates on federal accounts by another 0.25%, which is expected on May 3rd. This would follow the long streak that started in December 2022 and add another rate hike to push annual inflation back to the 2% target from 5.2% in March 2023.

As of this writing, the interest rate on federal deposits is between 4.5% and 5% , and interest rate traders give the following odds : 69.2% with an interest rate in the range of 5.25-5.50% and 30.8% chance at a range of 4.75% - 5% following the Fed's May 3, 2023 decision.

As for the cost of money in European accounts, Pablo Hernandez de Cos - governor of Banco de Espana and member of the governing council of the ECB - said yesterday, April 10, that monetary tightening is not over as “the core inflation is expected to remain elevated” in 2023, as reported by Reuters .

And by the way, Pablo Hernandez de Cos is one of the most dovish members of the Council according to InTouch Capital Markets estimates .

iShares MSCI Global Gold Miners ETF's Strong Positive Correlation with the Gold Price Implies a Sell Rating

Therefore, given the expected fall in the gold price from current levels, it would be prudent to reduce positions in securities that track gold performance and take advantage of recent highs in the price of gold.

Investors may want to sell some shares of iShares MSCI Global Gold Miners ETF as this fund's performance has a strong and positive correlation to physical gold price movements.

The Seeking Alpha chart below shows that price changes of gold futures, the gold price benchmark, correspond to movements of the same sign in the iShares MSCI Global Gold Miners ETF share price.

About iShares MSCI Global Gold Miners ETF

Investors buy and hold shares of the iShares MSCI Global Gold Miners ETF because they want to link the results of their portfolio of assets to the performance of publicly traded securities of multinational companies engaged in the global gold exploration and mining industry.

Established on January 31, 2012, the idea behind the creation of this fund is to track the returns of an index composed of publicly traded shares of global gold exploration and mining companies.

The company's website indicates that by investing in the iShares MSCI Global Gold Miners ETF, the investor should be able to pursue portfolio diversification while gaining exposure to gold, as assets in the basket generate profits from mining in various producing countries.

Because these miners' sales proceeds are affected by changes in the price of gold, the location of resources, economic conditions in the countries in which they operate and geophysical and political factors, the iShares MSCI Global Gold Miners ETF is a synthesis of all these factors and their balance at the same time.

The diversification thus achieved makes it possible to reduce the investment risk, even if the return could bear the brunt.

About iShares MSCI Global Gold Miners ETF Versus the Peer Group

Compared to other competing funds, the iShares MSCI Global Gold Miners ETF is slightly cheaper in terms of expense ratio, as the Seeking Alpha chart below shows:

In general, when you look at performance across different sub-periods, the stock of the iShares MSCI Global Gold Miners ETF appears to be outperforming the median of all of its peers.

The iShares MSCI Global Gold Miners ETF stock also pays dividends. Its key features and how it compares to its peers in terms of returns and growth are shown in the chart below.

The Stock Valuation Ahead of Expected Lower Price of Gold

As of this writing, shares of the iShares MSCI Global Gold Miners ETF were trading at $27.08 per unit, well above the 200-day simple moving average of $21.43, well above the 100-day simple moving average of $23.29 and the 50-day simple moving average of $23.47.

The stock price has fluctuated between a floor of $16.80 and a ceiling of $33.58 over the past 52 weeks and is also well above the $25.19 mean of the interval.

The iShares MSCI Global Gold Miners ETF stock is divided into 17,500,000 shares while the fund's net assets were valued at $463,292,693 or $26.47 per share as of 10 April 2023, meaning the iShares MSCI Global Gold Miners ETF is currently trading at a premium of 2.3%.

At the time of writing, the iShares MSCI Global Gold Miners ETF consists of 45 holdings and the top 10 of these, ranked by weight percentage in the fund, together account for approximately 75.2% of total assets, as shown in the screenshot below.

With analysts predicting a 12% fall in gold prices from current levels to $1,779.15 an ounce over the course of 2023, this could potentially put downward pressure on earnings of holdings in the iShares MSCI Global Gold Miners ETF. Because the fund represents US-listed equities of these holdings, its performance could suffer the impact of a down-trending gold.

Risk of Selling Shares of iShares MSCI Global Gold Miners ETF

By selling shares of the fund there is a risk of missing an opportunity for better returns, but this scenario would require a sustained rise in the price of gold.

With fears of a banking crisis behind us, the positive trigger for the gold price could be an economic recession. However, with a system that continues to create jobs, there is no sign yet of a significant contraction in the business cycle.

This means the Federal Reserve could make further rate hikes after May 3 if labor markets remain resilient, as the top monetary authority has always used labor data as a benchmark for monetary policy interventions.

Therefore, the risk of a lost opportunity after selling shares of the iShares MSCI Global Gold Miners ETF should not be significant at this point.

Risk is also impacted by still high inflation and the cost of fossil fuels, which could come under upward pressure following the OPEC+ decision to cut daily crude oil supplies by more than a million barrels.

More expensive sourcing of raw materials and inputs will not help profit margins, which could lead gold mining companies to review spending on developing metallic projects and exploration activities, postpone plans to pay off debt, and negatively revise production and cost forecasts.

These factors can play a role in determining the finances of mining companies and could potentially negatively impact the shares of the iShares MSCI Global Gold Miners ETF.

In addition, these companies are unlikely to borrow money for their operations and mineral projects now that borrowing costs have risen, as central banks tightened monetary policies to curb runaway inflation.

On the other hand, sustained high inflation, particularly in the hard-to-abate core, could put upward pressure on gold prices as investors would increase demand for the metal against associated headwinds from the rapid rise of goods and services prices.

Continued inflation also increases the likelihood of a recession if wages and pensions do not match the new cost of living as expected, which could dampen consumption and weaken growth opportunities as consumption accounts for 70% or more of the Gross Domestic Product [GDP]. Gold would make a strong comeback as a safe haven against the uncertainty caused by the strong economic slowdown.

In fact, the International Monetary Fund [IMF] has revised downwards its estimate of global GDP growth to 2.8% this year and 3% in 2024, both 0.1% lower than the previous estimate. The global economic outlook remains weak with downside risks amid disruptions caused by inflation and the Russian invasion of Ukraine, the IMF indicated on Tuesday, April 11, as reported by Reuters .

Conclusion

This analysis proposes a scenario of a falling gold price, supported by factors that would dictate a break from the current uptrend and the establishment of bearish sentiment.

A lower gold price and other headwinds for gold operator margins, such as persistently high inflation, high borrowing costs and more expensive procurement of production inputs lead to a Sell recommendation for the iShares MSCI Global Gold Miners ETF stock.

This US-listed stock tracks the performance of US-listed global gold exploration and mining companies.

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