The price of gold has gained 24% during 2016 in what has undoubtedly been a volatile year for equities and for the global economy.
That’s a key reason why I’m bullish on gold and on the prospects for Australia’s largest gold miner, Newcrest Mining Limited (ASX: NCM). Volatility looks likely to remain a feature of global stock markets for the foreseeable future and the gold price could keep on rising as investors seek out a perceived store of wealth during uncertain times.
I think that volatility will remain high during the remainder of 2016 due to a ‘perfect storm’. There is the uncertainty of Brexit as well as the potential for further unrest in the EU, while the US will soon elect a new President and this is likely to cause more investors to switch from a ‘risk-on’ to ‘risk-off’ attitude over the coming months.
As ever during such a period, gold is likely to benefit and this means potentially higher profits for Newcrest Mining.
In my view, a higher gold price is also on the cards because of a dovish and some may say fearful, US Federal Reserve. It has backtracked on its plan to raise rates multiple times in 2016 and this is great news for Newcrest and its gold-mining peers since it means less competition from interest-producing assets.
However, external factors are not the only reason why Newcrest Mining is a ‘buy’ in my opinion. I’m also optimistic about its current strategy. For example, in its most recent quarter, Newcrest was able to reduce its all-in sustaining cost per ounce by 4.5%, while at the same time increase its gold production by 2.6%.
This will have a positive impact on the company’s profitability and I’m also upbeat about Newcrest’s prudence when it comes to investing for the future. For example, it has reduced capex guidance for the full-year to USD$440 million – US$540 million from USD$480 million to US$575 million. While a rising gold price may indicate that greater investment is warranted, the gold mining industry only recently experienced a difficult period, so it seems sensible for Newcrest to cut costs, raise production and then once profitability is moving higher, invest more heavily for long term growth.
So, while Newcrest has already risen by 81% year-to-date and is up by 9% since last Thursday, I still feel there are more capital gains to come over the medium term.
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Motley Fool contributor Robert Stephens has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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