This may not seem like a good time to be looking at ASX gold stocks, but this is exactly why the sector could be appealing.
Gold stocks tend to underperform when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is rallying and vice-versa, and the top 200 share benchmark has gained 0.7% over the past five trading days – leaving our largest gold miners well behind.
But gold stocks could be entering a consensus upgrade cycle, just like what happened to our iron ore miners last year when the commodity price unexpectedly surged ahead of the longer-term assumptions made by leading brokers and stayed there for longer than anticipated.
Gold in cum-upgrade cycle
We might be seeing signs of the upgrade cycle unfolding for the gold sector with UBS increasing its valuation on a range of gold stocks as it upped its long-term gold price assumption to the spot price of around US$1,500 an ounce from US$1,300 an ounce.
The broker is feeling confident that the recent rally in the gold price is sustainable because of the large and significant decline in global government bond yields. The yields on several key sovereign bonds, including the 10-year Australian bond, have fallen to record lows, and while these yields have recovered some of the lost ground, they are unlikely to be heading much higher in this volatile economic environment.
That's great news for ASX gold producers, some of which got a recommendation upgrade by UBS on the back of its new gold price forecast, which increased the valuations of gold stocks under its coverage by around 30%!
ASX gold stocks upgraded to "buy"
The two biggest beneficiaries are the Regis Resources Limited (ASX: RRL) share price and the OceanaGold Corp (ASX: OGC) share price, both of which have run ahead of the market on Thursday.
Regis got upgraded by two notches to "buy" from "sell", while OceanaGold enjoyed a lift to "buy" from "neutral" by UBS.
"We have upgraded Regis to Buy (from Sell) because of the -5% decline in share price during 2019YTD, not sharing in the ~20% rally in the A$ gold price," said the broker.
"While the stock has risks such as a short life at Duketon, a large hedge book loss and delays at McPhillamys, we think these are now priced in."
Meanwhile, OceanaGold received an upgrade despite its problematic Didipio mine in the Philippines.
"The Oceana share price has not lifted with the sector due to mining lease issues at Didipio," said UBS.
"We think the share price implies almost no value to Didipio and potential resolution is therefore almost a free option."
UBS' top buys for the gold sector are Regis, OceanaGold and ALACERGOLD/IDR UNRESTR (ASX: AQG). The broker has a price target of $5.30 per share for Regis, $4 a share for OceanaGold and $7.60 a share for Alacer Gold.
