After a blockbuster start to the year, gold lost its luster plunging to one-year low thanks to a strengthening dollar and interest rate hikes. The yellow metal is down 10% from its January high, which confirms that the gold market has slipped into correction territory.
Below, we have discussed various factors that have influenced the price of the gold and will continue to do so:
Strong Dollar & Rate Hike
The U.S. dollar has enjoyed a strong rebound this year and is currently hovering near a one-year high. Meanwhile, the Fed has raised interest rates twice this year in quarter-point increments and is expected to implement two more lift-offs by the end of the year. Higher rates have diminished the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. The trend is likely to continue this year given the latest Fed testimony, which reaffirmed its plans to gradually increase interest rates.
Powell painted an optimistic view of the economy, citing that America is expanding at a faster pace. Robust job gains, rise in income and optimism among households have lifted consumer spending in recent months and may continue doing so. Unemployment rate is below 4% and inflation is running above the Fed’s 2% target for the first time in several years.
Trade War Fears Failed to Entice
Gold is generally viewed as a safe haven in times of economic or political turmoil. But the bullion is currently struggling to garner safe-haven demand despite the ongoing trade war as investors see dollar as a new safety investment in a strong economy. However, the escalation of trade dispute could trigger a global recession, raising the appeal for gold. Trump has indicated that he is willing to slap import tariffs on all $505 billion of Chinese goods. This is the latest update on the U.S.-China trade war after imposed tariffs of $34 billion on each other goods.
Also, trade conflicts could drive up inflation, leading to higher demand for gold as an inflation hedge.
Accelerating economic growth, strong corporate earnings and waning demand in the top two consumers, India and China, are also undermining the metal. Further, fresh buying of gold has reduced, resulting in lower physical demand. While demand will likely remain subdued in China given the trade dispute between the world’s two largest economies, India could see a pickup in consumption of the metal in the wedding and festive months ahead.
According to the World Gold Council (WGC), demand will likely to be healthy in the second half of the year on positive but uneven global economic growth, trade war and its impact on currency, rising inflation and an inverted yield curve. As such, the beaten down price of gold offers an attractive opportunity for buying.
However, going by the Zacks methodology, stocks in the gold mining industry appear expensive, with a P/E ratio of 24.48 compared with 14.41 for the broad basic material sector and 17.34 for the S&P 500 Composite Index. Further, the industry has a dismal Zacks Rank in the bottom 11%, indicating some pain in store for at least in the near term.
How to Play?
Given the mixed industry trends, investors should focus on stocks witnessing rising earnings estimates and a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). Earnings estimate revisions are the most powerful force impacting stock prices. Stocks with rising earnings estimates have a tendency to perform better than the other stocks in the group even if the industry fundamentals remain sluggish.
Hence, investors can safely bet on stocks that have been seeing an upward movement in earnings estimates. Below we have highlighted some of them:
Caledonia Mining Corporation PLC CMCL
It is an exploration, development and mining company which focuses primarily on Southern Africa. The stock has seen positive earnings estimate of 22 cents for this year over the past 60 days, with an expected growth of 25.93%. It has a Zacks Rank #2 and a VGM Score of C. CMCL has gained 16.2% this year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Eldorado Gold Corporation EGO
This is a gold production and exploration company with assets in Brazil and Turkey. The stock has seen positive earnings estimate by couple of cents over the past 60 days for this year and has an expected growth of 50%. The stock has a Zacks Rank #3 and a VGM Score of B. EGO has shed 25.2% this year.
Pretium Resources Inc. PVG
It is engaged in the acquisition, exploration and development of precious metal resource properties in the Americas. The stock has seen positive earnings estimate of 12 cents for this year over the past 60 days and has expected growth of 300%. It has a Zacks Rank #2 and a VGM Score of B. PVG is down 27.6% this year.
Northern Dynasty Minerals Ltd. NAK
It acquires, explores for, and develops mineral properties in the United States. The Zacks Consensus Estimate has been revised up from a loss of 18 cents to a loss of 12 cents over the past 60 days for this year. The company has substantial earnings growth of 29.41% for the current year. It has a Zacks Rank #2 and a VGM Score of F. NAK has tumbled nearly 71.7% so far this year.
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