Barrick Gold (NYSE:GOLD) has been coming back to life in recent weeks. While GOLD stock was flirting with a fall below $11.50 just a few weeks ago, it’s now trying to hold onto a potential breakout over $14. Is this 23% rally in just a few weeks too much, or is Barrick Gold stock set to continue running?
Simply put, GOLD stock generally acts as a proxy to gold prices. When uncertainty, fear and recession worries climb, often times the yellow metal does too. Currently, there’s a lot of that going around.
Rates, Rates, Rates
Even though stocks are near all-time highs and the labor market is strong, worries about a recession persist. The odds of a recession are on the rise, increasing the probability, but far from guaranteeing an economic retreat. Those odds are based on the yield curve. As the curve compresses, it raises the odds for a recession. When it inverts it has an eerie ability to foreshadow a recession.
These trends get more complex when considering the Fed’s role alongside global central banks. Because the global economy has maintained such low rates, it’s created immense demand for longer-dated U.S. Treasury bonds. They are safer from a credit perspective and have a far more attractive yield than all of its peers. For instance, why buy a French 10-year bond with a slightly lower rating yielding close to 0%, when you can buy a 10-year Treasury yielding ~2.1% right now?
While U.S. rates are historically low, they are high a global basis at the moment.
That’s driving long-term rates down at a time where the Fed was raising rates, helping to fuel an inversion. Now, odds call for a rate cut. And in fact, not just one but several. The market is pricing in a 94% chance that the Fed cuts rates by its September meeting. Investors are pricing in an almost 50% chance of two cuts by the same meeting.
Valuing Barrick Gold Stock
So what does all of that have to do with Barrick Gold stock? A lot, actually.
If the Federal Reserve cuts rates, it could give a boost to gold prices. That’s as it weakens the U.S. dollar and causes commodities to rise. Think of a company like Exxon Mobil (NYSE:XOM) or Chevron (NYSE:CVX) when oil prices catch a boost. The same can happen for GOLD stock.
As long as there are worries — think: trade war or recession related — they could also act as catalyst for gold prices.
As it relates to GOLD stock, analyst estimates aren’t bad, but are far from robust. Analysts expect revenue to grow 14.5% this year to $8.3 billion. Earnings are expected to grow 8.6% to 38 cents per share. That leaves GOLD stock with a price-to-earnings ratio in the mid-30s, which is not exactly value territory.
At the start of the year, Barrick completed its merger with Randgold Resources. This formed a $25 billion precious metal conglomerate. However, it didn’t take long for the new entity to pursue Newmont Mining (NYSE:NEM). Newmont rejected the bid, and the two eventually decided on a joint-venture partnership instead. But it’s clear that GOLD management has margin improvement and synergies in mind.
Even with $5.5 billion in long-term debt and $2.15 billion in cash, GOLD stock has a solid balance sheet. The fact that investors can collect any kind of dividend yield is nice too, given that they don’t receive any income from gold. Currently that yield is about 1.1%. Barrick is far from a mega-income generator, but it’s better than nothing
Trading Gold Stock Price
So where do we stand in all of this? Barrick Gold stock has decent but not great growth, a good balance sheet and a so-so, earnings-based valuation. But at the end of the day, it’s a gold miner and that means it depends on the price of gold to drive its share price. It’s worth pointing out that GOLD stock tends to outperform gold during the good times, but underperforms during the bad times.
That’s no surprise to anyone that follows the VanEck Vectors Gold Miners ETF (NYSEARCA:GDX) or the VanEck Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ). These follow a similar pattern when tracking against the SPDR Gold Trust ETF (NYSEARCA:GLD).
With GOLD stock price, we can see that shares broke out over range resistance at $14. Shares ran up to almost $14.50, where Barrick Gold stock topped out at in March. The trade now is simple — and simple is good.
Over $14 and investors can stay long the breakout. Below $14 and GOLD stock may need to reset. Perhaps that’s with a test of the 20-day moving average. Maybe it’s the 50-day. It may even fall back into its prior range and probe the range lows near $11.50 to $12.
But over $14 could get us a run to $15 and possibly much higher should gold prices really take off.