What Do You Want, Mr. Gold?

Barrick wants to buy Newmont. Trump wants a deal with China. Palladium wants to fly into space. And what does gold want?

Will Barrick and Newmont Create Gold Monster?

Do you remember our January 24, 2019 edition of the Gold News Monitor? We analyzed in that report the historic transaction in the bullion industry, i.e. the Newmont Mining's purchase of Goldcorp, which will create the world's largest gold miner. Forget it!

Today, we have something better for you. Yesterday, Barrick Gold Corporation, which is the largest gold mining company, announced that it has made a proposal to the Newmont Mining Corporation, the second-largest gold producer, to merge. The proposal assumes that each Newmont shareholder would receive 2.5694 Barrick shares per Newmont share, so the value of the proposed acquisition is at around $18 billion. So far, it seems that Newmont shareholders received the news about the proposal much better than Barrick's shareholders – just look at the stock market price reactions displayed in the chart below.

Chart 1: Barrick's stock price return (blue line) and Newmont's stock price return (orange line) over the last month.

The combination of the two would create "the world's best gold company, with unprecedented potential for value creation" and "the largest portfolio of Tier One gold assets", according to the Barrick. The merged company would have revenues of approximately $15.6 billion, total gold reserves of 141 million ounces and a market capitalization at almost $52 billion, based on today's share prices, more than three times larger than Franco Nevada, its nearest rival. What a golden beast!

However, nobody knows whether the deal comes to fruition. It is conditional on Newmont scrapping the deal to buy Goldcorp. And Newmont's top team seems to be skeptical, describing Barrick's proposal as "desperate and bizarre." In a statement published yesterday, the company said:

Newmont has previously determined that Barrick's risk and return profile is inferior on many fronts, including factoring Barrick's comparatively ineffective operating model, poor track record on delivering shareholder returns and unfavorable jurisdictional risk

What it certain is that the proposal is just another sign of the continuing consolidation in the precious-metals sector. And this is not without the significance not only for people investing in gold mining stocks but also for bullion investors. This is because the consolidation in the bullion industry usually occurs around gold bottoms. For example, the last big wave of M&A took place in the late 1990s, just at the end of the bear market in gold. And we have just heard about another acquisition proposal in the industry in recent weeks – so maybe something (read: gold's bottom) is in the air.

Will the Trade Wars End? Will It Support Gold?

Maybe! After all, the Fed has turned dovish recently, which should be supportive for the yellow metal. And now not only Powell but also Trump is extending a helping hand. What we mean here, of course, is Trump's announcement that he would delay a hike in tariffs on Chinese imports. It's a sign that the end of trade wars is not very far from us. After all, the president needs a deal before the next year's elections. Neither China wants escalation, as the country faces many domestic problems.

As trade wars were positive for the US dollar and negative for the gold market (we explained this in the December edition of the Market Overview), their conclusion should bring reverse effects.

Chart 2: Gold prices (London P.M. Fix) from January to October 2018.

Just look at the chart above. Between April and September, where trade wars were the most intense, gold significantly declined. Thus, gold bulls should welcome all positive news about the trade deal. Unless, they will be too positive and spur too strong risk-appetite which is usually negative for safe-havens assets.

And Now For Something Completely Different

We should probably, as we often do, conclude our analysis displaying the chart of gold prices. However, we would like to call your attention to palladium – its price has just jumped above $1,500. Incredible! We will examine its market in the March edition of the Market Overview. Stay tuned!

Chart 3: Palladium prices from February 22 to February 25, 2019.