Gold prices spiked to their highest level in more than six years on Aug 7 as the trade-related tussle between the United States and China aggravated, intensifying concerns of a global economic slowdown. On that day, the central banks of three major emerging markets -- India, New Zealand and Thailand -- cut interest rates to combat more aggressively against an impending global recession.
Gold Price Skyrockets
Gold price climbed to more than 1,500 per ounce for the first time since April 2013 on concerns of U.S. and global recession as well as anticipation of market participants for further rate cuts.
On Aug 7, gold futures for December Delivery surged 2.2% to $1,522.70 per ounce. Spot gold price also soared 2.4% to 1,508.80 an ounce. Year to date, return to gold jumped more than 18%, surpassing the market’s benchmark S&P 500 Index’s gain of a little over 15%.
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. As per Goldman Sachs Group, gold price may go up to 1,600 in the next six months.
Is China Heading for Currency War Against the United States?
Following President Donald Trump’s tweet dated Aug 1 to impose 10% tariff on a new set of $300 billion of Chinese exports effective Sep 1, the Asian economic super power allowed its currency yuan to fell below 7 to a U.S. dollar for the first time since 2008 on Aug 5. Lowering yuan’s price, China will make its goods attractive in the United States, enabling it to make up for some tariff-related revenue losses.
This resulted in mayhem on Wall Street, prompting the U.S. government to declare China as a currency manipulator for the first time since 1994. On Aug 7, China steadied its currency, setting the midpoint slightly above the psychological barrier of 7 to a dollar.
However, on Aug 8, the People’s Bank of China fixed yuan’s midpoint at 7.0039 per dollar, its weakest level since 2008. In early morning trade, onshore yuan was trading at 7.0429 per dollar while offshore yuan climbed to 7.0703 a dollar. Notably, the People’s Bank of China allows yuan to vary at a 2% band around its midpoint every day.
Yields on Government Bonds Plummet Globally
Market participants are moving to safe-haven sovereign bonds from risky assets like equities. This results in a rally of government bonds’ prices and plunging yields. On Aug 7, the yield on benchmark 10-year U.S. Treasury Note dropped to 1.6%, the lowest in nearly three years before closing at 1.7%.
Yield on 10-year German bunds fell to a record low of negative 0.6%. Yields on 10-year French, Dutch and Japanese bonds also entered into negative territory. British 10-year bond fell to its lowest level ever, yielding just around 0.5%.
Notably, at the end of 2018, around $8 trillion was invested in bonds with negative returns. However, this figure has increased substantially to $15 trillion so far in 2019. This clearly indicates worldwide recessionary fears among market participants.
Market Looks Forward for Fed’s Next Move
On Jul 31, Fed cut the benchmark interest rate by a 25 basis point to a range of 2-2.25% for the first time in more than a decade. However, market participants are expecting one or two more cuts this year. As of Aug 7, per CME FedWatch, there is 65% probability of a 25 basis point cut and 35% probability of a 50 basis point cut in benchmark interest rate further in September.
Lingering trade conflict with China, slowdown in the global economy especially in the manufacturing sector, gradually deteriorating business confidence in the United Sates and muted inflation in both domestic and international markets are major concerns for the central bank. Fed Chair Jerome Powell reiterated his stance to do whatever needed to sustain U.S. economic expansion.
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.
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. The company has expected earnings growth of 110% for the current year. The Zacks Consensus Estimate for the current year has improved by 61.5% over the last 30 days. The stock has jumped 64.3% 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 280% for the current year. The Zacks Consensus Estimate for the current year has improved by 46.2% over the last 30 days. The stock has jumped 56.1% 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 8.2% over the last 30 days. The stock has surged 46.5% in the past three months.
B2Gold Corp. BTG explores and develops 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 5.9% over the last 30 days. The stock has surged 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 Canada and Australia. The company has expected earnings growth of 63.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.2% over the last 30 days. The stock has soared 39.9% in the past three months.
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 6.8% over the last 30 days. The stock has soared 26.5% in the past three months.
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