The next phase of market volatility seems to have appeared on Wall Street since the beginning of August. On Aug 1, stock markets were shaken by President Donald Trump’s tweet that the U.S. government will impose 10% tariff on a new set of Chinse goods worth $300 billion effective Sep 1. Trump further said that the tariff rate could go up to 25% later if required.
The immediate effect of President Trump’s tweet was seen on Wall Street as the three major stock indexes ---- the Dow, S&P 500 and Nasdaq Composite ---- plunged 1.1%, 0.9% and 0.8%, respectively. Just before the tweet, both the Dow and the S&P 500 were up more than 1% while the Nasdaq Composite had jumped 1.6%. The Cboe Volatility Index (VIX), recognized as the best fear gauge of Wall Street, spiked 10.9% to 17.87.
No End to U.S.-China Trade Conflict
Trade-related dispute between the United States and China is one and half years old. The United Sates has already levied 25% tariff on $250 billion Chinese exports while China has reciprocated with 25% tariff on $110 billion U.S. goods.
Trade talks, which broke down in May, restarted in July, and last week high-level delegates of two countries met in Beijing for the first time since the two presidents met in the G-20 summit on May 31. The meeting was termed constructive by both sides. Despite these developments, after Trump’s tweet on Aug 1, there is a dark cloud on the future of the U.S.-China trade deal.
Immediate Effect of Trump’s Tweet
The ICE U.S Dollar Index, which measures the price of U.S. currency against six major global currencies, fell 0.2% to 98.35 after hitting a more-than-two-year-high of 98.45 earlier in the day. U.S. dollar slid on fears of global economic slowdown stemming from trade dispute.
Yield on benchmark 10-year U.S. Treasury Note plummeted to 1.87% from a high of 2.05% early in the day as investors shifted to safe-haven government bonds from risky equities. Moreover, the 3-month U.S. Treasury Note is yielding 2.07%, implying an inversion of yield curve, which is considered by several economists as a reliable indicator of an impending recession.
Is Further Rate Cut in the Offing?
On Jul 31, Fed reduced the benchmark leading rate by 25 basis points to the range of 2-2.25%. Although Fed Chair Jerome Powell said that this rate cut is to “insure against downside risks,” and there was no signal that this is the start of a lengthy rate cut cycle, several economists believe that the central bank may need to cut rate one or two more times after Trump’s tweet.
According to these economists, the latest round of tariff war has the potential to bring recession in both the U.S. and global economy. So far, the U.S. government has imposed tariff on intermediary goods to be used by U.S. corporates to develop high-tech products.
However, 68% of the new Chinese goods which will face tariff will be either on consumer goods or auto parts. This is likely to severely dent consumer confidence besides gradually deteriorating business confidence. The end result will be recession, compelling the Fed to cut rates and boost growth.
Gold Price Surges
Gold price spiked to more than six-years high on Aug 1 on concerns of U.S. and global recession as well as anticipation of market participants for further rate cuts. Price of gold future for December delivery on Comex was up at $1,449.50 an ounce after hitting $1,451.60 earlier in the day in electronic trading, marking the highest price since May 2013.
The lower the interest rates, the lower will be the opportunity cost of holding non-yielding bullion, making gold attractive for investors holding other currencies. Buying pressure on gold is likely to remain firm as investors will focus on precious metals as a store of wealth and hedge against market turmoil.
Our Top Picks
At this stage, it will be prudent to invest in gold stocks with strong growth potential. We have narrowed down our search to six such stocks, each of which carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. All six stocks skyrocketed in the past three months despite volatility and still have upside left.
Franco-Nevada Corp. FNV is a gold-focused royalty and stream company with additional interests in platinum group metals and other resource assets. The company has expected earnings growth of 21.4% for the current year. The Zacks Consensus Estimate for the current year has improved by 8.4% over the last 30 days. The stock has soared 27.9% in the past three months.
Alamos Gold Inc. AGI engages in the acquisition, exploration, development, and extraction of gold deposits in North America. It also explores for silver and precious metals. The company has expected earnings growth of 260% for the current year. The Zacks Consensus Estimate for the current year has improved by 38.5% over the last 30 days. The stock has jumped 64.6% in the past three months.
B2Gold Corp. BTG engages in the exploration and development of mineral properties for gold deposits in Nicaragua, the Philippines, Mali, Colombia, Burkina Faso, and Namibia. The company has expected earnings growth of 12.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 12.5% over the last 30 days. The stock has surged 27.2% in the past three months.
Kinross Gold Corp. KGC engages in the acquisition, exploration, and development of gold properties in the United States, the Russian Federation, Brazil, Chile, Ghana and Mauritania. It is also involved in the reclamation of gold mining properties and production and sale of silver.
The company has expected earnings growth of 110% for the current year. The Zacks Consensus Estimate for the current year has improved by 75% over the last 30 days. The stock has jumped 46.5% in the past three months.
Kirkland Lake Gold Ltd. KL engages in the provision of mining and mineral exploration. It focuses on gold assets primarily in Macassa Mine Complex, the Taylor Mine located in northeastern Ontario and the Fosterville Gold Mine located in the state of Victoria, Australia.
The company has expected earnings growth of 64% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.7% over the last 30 days. The stock has surged 44.3% in the past three months.
Royal Gold Inc. RGLD acquires and manages precious metal streams, royalties and related interests, with the primary focus on gold. The company has expected earnings growth of 40.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.2% over the last 30 days. The stock has soared 45.4% in the past three months.
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Franco-Nevada Corporation (FNV) : Free Stock Analysis Report
Kinross Gold Corporation (KGC) : Free Stock Analysis Report
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Alamos Gold Inc. (AGI) : Free Stock Analysis Report
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Kirkland Lake Gold Ltd. (KL) : Free Stock Analysis Report
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