With seasonal dynamics at play along with the US central bank likely to soon ease back on interest rate hikes, now is a good time for investors to buy into gold stocks.
That's the view of broker Stifel GMP, which has examined the current macroeconomic picture and likely upcoming themes.
"Over the past decade, gold has consistently posted outsized returns through December and January. Through these two months, gold has beat the S&P 500 more than 60% of the time. This has translated to an out-performance of gold miners' equities through this period of seasonality," noted the analysts.
READ: Cost pressures remain sticky for Canadian precious metals miners in 3Q amid first inklings of relief, say Stifel analysts
They pointed out that over the last decade, the VanEck Gold Miners exchange-traded fund (ETF) (GDX) has outperformed the S&P 500 by 5.3% from November 30 to January 31.
And analysts added that the next few months were "just the beginning", turning to the question of when the Federal Reserve was likely to pivot from its monetary tightening stance.
Recent commentary from US central bankers points towards this slowdown (of rate hikes) starting in December, moving to a 50bp hike (from the previous four hikes of 75bps), they said.
Stifel has gone back in time looked and looked at 10 periods where US benchmark rates have peaked, looking at cycles from five months prior to peak rates being hit (the current situation) through the following six months.
They noted that the yellow metal averaged a gain of 18% and outperformed the S&P 500 by 9.7% through such rate peaks.
A strong tendency to outperform
"On average, a recession has followed 10 months after peak rates are hit," they added. "Gold shows a strong tendency to outperform through recessionary periods, up 18% on average and beating the S&P 500 by 26.3%."
Stifel GMP also highlighted the current short covering of gold on trading floors, seeing that as a potential sign of gains coming. In other words, traders are rushing to close short positions (betting on the price going down) because the gold price is actually rising, which in turn, also pushes prices higher.
"Short covering rallies have been a driver of gold price gains in the past with 17 occurring since 2000," said analysts.
"These have averaged 12 weeks in duration with gold gaining 13.4% and equities up >26%. Since the recent short covering action started, gold has gained just 5.3%, so we see a runway for substantial upside."
The broker highlighted producers K92 Mining Inc (TSX-V:KNT), B2Gold Corp and Alamos Gold Inc, all of which it rated 'Buy', as being "fundamentally sound, undervalued names ripe for re-rating".
Other Canada-listed producers include Soma Gold Corp, which owns and operates three producing mines in Antioquia, Colombia, and Mongolia-focused Steppe Gold, Asia's newest gold producer, which produces from its ATO mine in the country.
Contact the author at giles@proactiveinvestors.com