Gold Proves Weakest Major Metal

While the gold price ended 2016 higher than it began the year, the yellow metal was one of the weakest performers among major metals

Daniel Rohr, CFA 12 January, 2017 | 12:20PM

We view the basic materials sector as overvalued; on a market-capitalisation-weighted basis, our coverage trades at a 25% premium to our fair value estimates.

The valuation disconnect largely reflects our bearish long-term outlook for Chinese fixed-asset investment. Many materials sector stocks enjoyed a stellar run in 2016 thanks to Beijing’s renewed stimulus efforts, which buoyed demand and prices for commodities ranging from coal to copper to iron ore. The market appears to be valuing commodity producers as if prevailing prices are sustainable.

We expect gains to prove fleeting, as we doubt the sustainability of the credit-fuelled, investment-led growth model. Amid the run-up in metal prices, gold was an underperformer in 2016. We’re more constructive on gold than industrial commodities in the long run, largely because of rising consumer demand from India and China.

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About Author

Daniel Rohr, CFA  is a senior equity analyst at Morningstar.

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