Gold prices witnessed volatility throughout 2016. The yellow metal started the year at a low and went on a rally in the first half of 2016 driven by uncertain monetary policies in the U.S. and the Brexit episode. This was, however, followed by a decline in the recent times.
This decline can be attributed to several factors. Foremost, the Fed recently raised interest rates by 25 basis points to the 0.5–0.75% range, marking the second hike in a decade. A rate hike has an adverse impact on the price of gold as the metal provides no yield and has to compete with interest paying assets in the wake of rising borrowing costs. Further, it was hinted that there would be three rate hikes in 2017.
Recently, the U.S. dollar saw its value appreciate to a 14-year high, which hurt the price of gold. This is because a strengthening dollar decreases the value of other currencies, which in turn, lowers demand for gold.
Further, demand for gold witnessed a decline in China and India. While devaluation of the yuan made the metal more expensive, the demonetization of high-value currency notes in India caused a cash crunch, in turn hurting retail demand.
What’s Ahead in 2017?
There is a lot of uncertainty regarding the direction gold prices will take in 2017. While possibilities of a price hike are bleak, a number of factors can drive the metal higher.
Fed Rate Hike – After the last interest rate increase, Fed officials hinted at three more hikes next year. Note that expectations of multiple hikes were high in 2016 too, which however, turned out to be unfulfilled in the end. This could repeat in 2017, in turn, lending some support to gold prices. Moreover, while President-elect Donald Trump’s policies are expected to spur economic activity, the resulting appreciation in the U.S. dollar could prove to be anti-inflationary, which could further lead to a reduced number of rate hikes during the year.
Demand in Asia – Asiadepicted weak demand in the last few months of 2016, which is expected to reverse in the 2017. Demand in India, the second-largest consumer of gold, is expected to rise. Retail gold sales in the sub-continent’s economy saw a sharp decline post the government’s demonetization decision. However, this is expected to normalize in a few months and demand is expected to pick up pace again. In China, gold demand is expected to remain steady despite a decline in the yuan.
Geo-political & Eurozone Risks –Eurozone currently faces a disintegration risk. The Brexit vote and talks of multiple referendums has increased the uncertainties related to the future existence of the economic group of countries. With increasing probabilities of the exit of several member nations, such as France and Netherlands, gold may prove to be a safe haven for investors over the long haul.
Stocks to Consider
It’s quite evident that gold stocks are facing significant uncertainty right now. In such a scenario, it is important to find the right stocks if you want to increase potential returns.
We have chosen value stocks with strong fundamentals that could witness higher returns. A value stock implies stocks trading lower than their fair value or intrinsic value, which can therefore offer a significant upside potential. For this particular strategy, the stocks with a Value Score of ‘A’ or ‘B’ have been selected.
We have zeroed in on stocks with a low price/earnings (“P/E”) ratio as these can prove to be great bargains. A low P/E indicates a decline in a stock’s price or an improvement in its earnings performance.
Beadell Resources Limited BDREF is a gold producer based in Australia. The company owns and operates the Tucano gold mine in Brazil. It has a Value Score ‘B’ and a P/E of 2.36. The company has a Zacks Rank #3 (Hold).
B2Gold Corp. BTG, based in Canada, is involved in the exploration and development of gold. It has a Value Score ‘B’ and a P/E of 16.74. The company carries a Zacks Rank #3. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.
Caledonia Mining Corporation Plc CALVF is headquartered in the Channel Islands. It is an exploration, development and mining company that focuses primarily on Southern Africa. It has a Value Score ‘A’ and a P/E of 3.62. The company has a Zacks Rank #3.
Sibanye Gold Limited SBGL, a South African gold miner, operates two gold mines. It has a Value Score ‘B’ and a P/E of 4.58. The company holds Zacks Rank #3.
Timmins Gold Corp. TGD is a gold mining and exploration company in Mexico, which is headquartered in Canada. It has a Value Score ‘A’ and a P/E of 3.44. The company carries a Zacks Rank #3.
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