ASX gold stocks are among the rare bright spots on the market amid the sharp sell-off, but is it too late to buy into the sector?
The S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index took a walloping as it shed 1.9% to hit a five-week low today after China stopped buying US agricultural products and allowed its currency to depreciate against the US dollar.
Investors should brace for a new battle front as the trade war is expanding to include a currency war. Currency wars are as bad for the global economy as a trade war although one sector will shine in this new conflict!
Yup, you guessed it – it's gold.
Currency war winner
The precious metal's reputation as a store of value increases when investors lose confidence in the value of fiat currencies. Given that the unfolding currency war has a long way to run as we are only at the start of the battle means gold is unlikely to lose its lustre anytime soon.
If anything, we are likely to see the commodity hit new multi-year highs in US dollar terms and even challenge its previous record of nearly US$2,000 an ounce that was hit in 2011.
The news is even better from an Aussie dollar perspective as our currency is tumbling. The Aussie is seen as a barometer of the Chinese economy given how dependent our financial well-being is on the Asian giant.
A weaker Yuan will likely mean a weaker Australian dollar – and that means ASX gold miners with local operations will get an extra tailwind!
Broker's key gold pick
The problem is that the Newcrest Mining Limited (ASX: NCM) share price, Evolution Mining Ltd (ASX: EVN) share price and Northern Star Resources Ltd (ASX: NST) share price already reflects a lot of the good news after their strong outperformance.
I think there's more upside to these share prices (especially for Evolution), although Morgans is suggesting a better place for investors to hunt for value.
"Many gold stocks rallied strongly due to the favourable commodity price (especially the larger producers including EVN, NCM and NST) and look to be trading at elevated levels," said Morgans.
"As the larger producers become fully valued, investors begin to look at smaller producers that may be getting less attention such as emerging mid-tier producers."
The broker's key mid-tier gold pick is Ramelius Resources Limited (ASX: RMS). Morgans likes the stock for its increasing reserve life through acquisitions and organic growth, the ramp-up in production by an estimated 10% in FY20, its growing corporate appeal as a takeover target and its strong balance sheet which holds no debt and over $100 million in cash.
