Gold price skyrocketed after remaining range bound in the first five months of this year. The rally was primarily driven by three macro factors --- Fed’s signal of a rate cut possibly next month, geopolitical tension in Iran and an impending global economic slowdown.
Moreover, if the upcoming meeting between President Donald Trump and his Chinese counterpart Xi Jinping turns out fruitless, gold price would soar further. 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.
Gold Price Hits Record High
On Jun 24, the gold futures for August delivery gained more than 1% to close at 1,418.20 per ounce after touching an intraday high of 1,424.90 per ounce, its highest since Aug 28, 2013. Month to date, gold price is up more than 6.5% after gaining 1.6% in May. If this trend continues, it will be the best back-to-back monthly gain for the yellow metal since it gained more than 8% in the January-February 2017 period.
Year to date, gold price has advanced more than 9%, marking its best performance so far this year, after posting a record gain of 13.7% in 2017. Several industry researchers have estimated that gold price could hit 1,440 per ounce in 2019 if momentum remains strong.
Fed Signals Rate Cut
On Jun 19, in his speech following the FOMC meeting, Fed Chair Jerome Powell said that the benchmark lending rate was kept intact at 2.25-2.5%. However, the central bank said that the adoption of a more accommodative policy is gaining ground as some economic data raised concerns about U.S. and global growth.
Notably, out of the 17 voting members of the Fed, a strong bunch of eight is expecting a rate cut this year. Fed’s statement boosted investor confidence. Per CME FedWatch, traders are assigning 100% probability to a rate cut of at least 25 basis points in July.
Since Jun 19, the U.S. dollar price index has declined 1.6% while gold futures have rallied 5.6%, helping the yellow metal to break a key resistance at $1,360 - $1,365 per ounce.
Escalation of Geopolitical Tension in Iran
Geopolitical conflict in Iran intensified on Jun 13 when two oil tankers were set on fire in the Strait of Hormuz, for which the United States blamed Tehran. On Jun 20, the Revolutionary Guard of Iran claimed that it shot down a U.S. drone near the Strait of Hormuz. Iran alleged that the drone had entered its sky, which the U.S. military claimed as international airspace.
On Jun 24, President Trump signed an executive order imposing tough new sanctions on Iran. The new sanctions will deny Iran’s supreme leader Ayatollah Ali Khamenei and his office to access key financial resources. Notably, Iran is already facing U.S. sanctions regarding crude oil exports after the Trump administration withdrew from the Iran Nuclear Agreement of 2015.
Tepid Global Economic Data
In the United States, non-farm job addition in May came in at just 75,000. Moreover, total job addition in April and March was reduced by 75,000. U.S. manufacturing is suffering due to lack of global demand. The ISM Manufacturing Index for May came in at 52.1, the lowest level since October 2016.
China’s official manufacturing PMI for May slipped to 49.4, from April’s reading of 50.1. PMI readings below 50 signal contraction in the Chinese manufacturing sector. The National Bureau of Statistics of China reported that value-added industrial output rose 5.0% in May compared with 5.4% in April. This was the lowest growth rate in 17 years.
The Ifo business-climate index for Germany fell to 97.4 points in June, the lowest level since November 2014. The reading for May was 97.9. Companies' expectations index fell to 94.2 points in June from 95.2 points in May.
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 five such stocks, each of which carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our five picks in the past three months.
AngloGold Ashanti Ltd. AU is the largest gold producer at 7 million ounces a year, with reserves of 126 m oz. It has operations in six countries on three continents, some of which are joint ventures, as well as exploration activities in 10 countries. The stock sports a Zacks Rank #1. The company has expected earnings growth of 90.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 2% over the last 60 days.
Rio Tinto Group RIO is an international mining company, currently sporting a Zacks Rank #1. It has interests in mining for aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium, dioxide feedstock, diamonds, talc and zircon. The company has expected earnings growth of 36.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 3.1% over the last 60 days.
SSR Mining Inc. SSRM engages in the acquisition, exploration, development, and operation of precious metal resource properties in the Americas. The Zacks Rank #1 company primarily explores for gold and silver deposits. The company has expected earnings growth of 73.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 14.3% over the last 60 days.
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 carries a Zacks Rank #2 and has expected earnings growth of 12% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.6% over the last 60 days.
BHP Group plc BBL engages in mining of copper, silver, lead, zinc, molybdenum, uranium, gold, iron ores, metallurgical and energy coal. The stock carries a Zacks Rank #2. The company has expected earnings growth of 13.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.5% over the last 60 days.
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Franco-Nevada Corporation (FNV) : Free Stock Analysis Report
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