Mining Stocks Have Further To Gain By Historical Standards CIBC

By Kitco News

Thursday August 11, 2016 12:25

(Kitco News) - If history is any indication then gold and silver mining stocks have further upside potential even after the strong rally the market has seen so far this year, according to one Canadian bank.

In a report published Thursday, analysts at CIBC World Markets confirmed their overweight call for the precious metals sector even if gold prices stabilize around $1,300 an ounce. Year to date, gold future are up more than 27%, with December gold futures last trading at $1,353.20 an ounce. A the same time The Market Vectors Gold Miners Exchange-Traded Fund (NYSEARC: GDX) is up 123%, last trading at $31.49.

“It is worth remembering that gold stocks substantially outperformed the underlying metal from the late 1970s until the end of the last century. This should be the ‘norm’ as higher realized gold prices are magnified on gold companies' earnings and cash flow if the companies are able to maintain production and control costs,” the analysts wrote. “CIBC continues to recommend investors carry, at least, a market-weight position in gold stocks compared to their relevant benchmark. The following gold stocks have been selected for quality and/or torque: Agnico-Eagle, Alamos, Barrick, Detour, Franco-Nevada, Newmont, Pretivm, Randgold, SEMAFO, and TMAC.”

Looking ahead, CIBC is forecasting gold prices to average $1,300 an ounce for 2017 and 2018, which it adds will be enough to support mining stocks. Even if gold sees a modest pullback, the bank expects miners to hold on to most of their gains.

They said global negative interest rates and devaluing currency markets are expected to provide long-term support for precious metals.

“Whether it is declining (or negative) interest rates or quantitative easing, it is difficult not to link these central bank actions with an attempt to debase other global currencies versus the US as the only global economy that is able to show reasonable growth,” the analysts said. ”Anything that debases fiat currency is positive for gold.”

For the precious-metals miners, the analysts explained that although the sector has seen significant gains so far this year, it is still down 43% from its peak. In previous recoveries, the sector has managed to recoup about 85% of its losses, they added.

One of the reasons the sector has underperformed compared to previous rallies is because investors are still a little nervous as the long-term bear market is still a fresh memory.

The bank said based on the current weighting in the S&P/TSX Index, Canadian investors should have about 10% of a balanced portfolio in mining stocks; however, most investors only hold about 2%.

“The apparent aversion to gold stocks appears to be founded on the weaknesses the stocks experienced in the past and may not reflect the strides that the companies have made to contain costs and improve fiscal discipline,” the bank said.

Earlier in the week CIBC warned that although it is overweight in the precious metals sector, with interest rates at such low levels, investors should be more defensive as the risk are rising of a positive “interest rate shock.”

In its own quantitative easing strategy, CIBC is about four-times overweight in the mining sector, which presents about 16% of its portfolio. This is the biggest position the Canadian bank has had in the mining sector in five years.