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Macro Data Supports Upside in GOLD Stock

A gold bull market implies margin expansion and cash flow growth

With the broad markets plunging in the recent past, there are very few stocks that have remained resilient or provided positive returns. Barrick Gold (NYSE:GOLD) is one name that has attracted investor attention and provided positive returns. At the end of 2019, GOLD stock closed at $18.53. Currently, the stock is up 6.5% for the year and trades at $19.87. I believe that there is further upside for Barrick Gold and this column will discuss the positive triggers.

Macro Data Supports Upside in GOLD Stock
Source: madamF /

From a technical perspective, GOLD stock has witnessed consolidation in the range of $16 to $18 per share and I expect strong support in this zone. The breakout rally has been triggered by fundamental factors that can potentially ensure that GOLD does not breach the support zone.

GOLD Stock Will Trend Higher with Precious Metals Upside

It’s easy to guess the reason for the resilience in GOLD stock in 2020. For nearly six years, gold was trading sideways in a tight range. Gold started surging higher in the second half of 2019 and currently trades at $1,659. There are strong reasons to believe that the precious metal will trend higher in the foreseeable future. Some factors are as follows.

Coronavirus cases have been surging globally and this has impacted global trade, manufacturing and services. The global manufacturing and services sector were in recession for February 2020. Market participants are therefore moving from risk-on to risk-off trades and this trend is bullish for gold, Treasuries and cash.

In response to weak growth, the Federal Reserve recently cut rates by 50 basis points. The markets are expecting a rate cut of another 75 basis points. With aggressive expansionary monetary policies, gold is likely to surge higher. The Fed’s expansionary policy is also reflected in the central bank’s balance sheet expansion since the last quarter of 2019.

Therefore, with weak growth, expansionary policies are likely globally and this will support the strong momentum for precious metals. Further, central banks have been aggressively buying gold in the last few years. With geopolitical frictions, this buying is likely to sustain to diversify reserves. This supports demand for gold and its upward trajectory.

Why I am Bullish on Barrick Gold

Gold stock has been moving higher and the following factors will continue to support the upside momentum.

For fiscal year 2019, Barrick Gold reported a realized gold price of $1,396 an ounce. The gold price is currently trading 20% higher at $1,674 an ounce. Further upside in the gold price is likely on continued expansionary monetary policy. Therefore, Barrick Gold is well positioned for strong top-line growth as realized price in FY2020 is likely to be significantly higher.

For FY2019, Barrick Gold reported an all-in-sustaining-cost of $894 an ounce. For FY2020, the company expects relatively higher AISC at $945 an ounce (mid-range of guidance). Even with higher AISC, Barrick Gold is well positioned for EBITDA margin expansion. This should prop GOLD stock higher.

Barrick Gold has already been generating positive free cash flows. The company’s FCF increased from $365 million in FY2018 to $1.1 billion in FY2019. With higher realized price and potential margin expansion, it would not be surprising if FCF is approximately $1.5 billion in FY2020. In the fourth quarter of FY2019, Barrick Gold increased dividend by 40% as compared to Q3 2019. As FCF increases, I expect higher dividends in this fiscal year. Strong growth, robust cash flow and increasing dividends will make GOLD stock attractive.

As of FY2017, Barrick Gold had net debt position of $4.2 billion. The company’s net debt has declined to $2.2 billion as of FY2019. Clearly, Barrick Gold has been on a path to deleveraging. As gold prices surge, the company is well positioned to accelerate investment expenditure and benefit from higher realized prices.

Barrick Gold reported proved and probable mineral reserves of 62 million ounces in FY2018. At the end of FY2019, the company’s proved and probable reserves increased to 71 million ounces. Therefore, the company’s reserve replacement has therefore been robust, and this adds to the positive triggers.

My Concluding Thoughts

Amidst the broad market plunge, GOLD stock has been standing tall. The strong stock performance has been backed by a higher gold price. From a company perspective, a higher realized price, EBITDA margin expansion, cash flow growth and higher dividends are positive triggers.

Further, GOLD stock will continue to rally this year with expansionary monetary policies, which is positive for precious metals.

Therefore, the stock is worth considering even at current levels.

Faisal Humayun is senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock-specific articles with a focus on the technology, energy and commodities sector. As of this writing, he did not hold a position in any of the aforementioned securities.

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