Why are gold stocks undervalued?

Morningstar analysts expect gold prices to bounce back, lack of economic moat and high uncertainty keep these stocks out of 5-star territory.

Ruth Saldanha 27 September, 2018 | 5:00PM

We recently ran an article on the most undervalued stocks based on our fair value estimates, and found that six of the top-10 names on the list were gold-related stocks. So why are these stocks trading below our fair estimates?

One reason is that the gold price itself has fallen dramatically this year. six months ago, the price was roughly US$1,350 per ounce, and in recent weeks the price has dipped below US$1,200 per ounce. A lot of this has to do with weakening investment demand, says Morningstar Equity Analyst Kristoffer Inton, adding that Morningstar forecasts gold to return to $1,300 by 2020.

"As the Federal Reserve continues to raise rates, the opportunity cost of holding gold rises, making it less attractive for investment purposes. That being said, we think over the next few years, rising jewellery demand (the largest single demand category for gold already) will more than make up for the gap left by investment demand. We anticipate this to be driven by China and India, where rising incomes and strong cultural affinity for gold should drive additional purchases," he noted.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Agnico Eagle Mines Ltd54.94 CAD1.63
Barrick Gold Corp26.83 CAD-0.22
Eldorado Gold Corp6.15 USD-7.80
Eldorado Gold Corp8.70 CAD-6.35
Iamgold Corp3.10 CAD-6.06
Kinross Gold Corp5.65 CAD-4.07

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca