Coronavirus Is Bullish For Gold Prices And Gold Stocks
Mar. 11, 2020 8:37 PM
Gold Mining Bull
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Summary
The spread of COVID-19 (coronavirus) has created buying opportunities in the precious metals sector.
Gold is a classic safe haven investment during periods of turmoil.
Gold prices are holding up over $1,600/oz while stocks plummet. Gold has gained value relative to stocks.
Most gold mining operations have not been impacted by the virus, and the costs of production should fall with lower oil prices.
I break down why I feel gold stocks are a buy here.
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Coronavirus Is Good News For Gold Prices And Miners
(Current gold prices. Credit: StockCharts)
With stock markets and oil prices plunging this week on increased concerns of the growing COVID-19 pandemic, investors are hiding out in gold, cash and bonds as safe havens. But gold miners and the streaming/royalty companies are also looking very attractive here and should be targeted by value & contrarian investors. When the dust settles, I think this will be one of the strongest performing sectors.
Gold is still cheap compared to stocks
(Credit: StockTrends)
Despite the heavy sell-off in stocks and the relative strength in gold prices, I don't think we're anywhere near the normal, or historic, ratio of gold prices in relation to stocks.
Investors should look at the Dow-to-Gold ratio, which is a measure of how many ounces of gold it would take to buy the Dow on any given month. Previous cycle lows have been 1.94X in February of 1933 and 1.29X in January of 1980." Back in 2011, the ratio hit a 10-year low of 6.36X. We are currently near 14X.
If we were to see this ratio get back to the 7X level, which seems like a real possibility based on ratios of the past, that would mean if the Dow Jones fell further to 18,000, then gold prices would need to trade at $2,571/oz.
Alternatively, if the Dow remained around current levels of 22,000, then gold would need to trade at $3,142/oz, to hit the 7X mark.
I believe we're about to see this ratio drop even further based on the potential for a much steeper decline in stocks and more investors to turn to gold as a safe haven with coronavirus spreading. This latest gold rally has strong legs and the increased likelihood of a global recession could send gold to new highs.
I expect the selling pressure on stocks to continue over the next few months as the outbreak gets worse and more cases are brought to light - we are now at 115,000 cases worldwide, as of writing. Gold prices are likely to continue to show strength relative to stocks, and potentially rise to new highs this year.
In my view, gold is a better alternative to holding any currency (including the U.S. dollar), as central banks are likely to resort to some form of currency devaluation in response to a weakened economy.
