While controversial cryptocurrency Bitcoin, which some pundits are calling the new gold, continues its precipitous plunge after briefly trading about US$11,000 in recent days, the yellow metal has proven to be less volatile and more resilient. After briefly trading as high as US$1,346 per ounce in early September, gold has pulled back to be trading at US$1,275 per ounce. This is despite being under pressure from an improving economic outlook and firmer U.S. dollar. There are signs that gold will surge once again and break through the psychologically important US$1,300 mark in coming months.
Now what?
While there are several fundamental price drivers for higher gold, among them, low interest rates and a weaker U.S. dollar, two of the most influential drivers in recent years, have been economic uncertainty and geopolitical crises.
The overall outlook for the economy globally continues to improve. The International Monetary Fund (IMF) recently upgraded its forecast global GDP growth for 2017 to 3.6% and 3.7% for 2018, which is 0.1% higher than originally predicted.
Then there is the U.S. economy, which, for the third quarter 2017, expanded at its fastest rate in three years. GDP grew by 3.3% for the quarter, which was 0.2% greater than the second quarter and 0.3% higher than the rate of growth previously thought to have occurred. There are signs that if Trump can successfully implement his tax reforms and other fiscal stimulus that strong growth will continue.
Nevertheless, despite these positive economic developments, the global economy is still replete with fissures and wracked by uncertainty.
The risk that Trump will be unable to effectively carry out his planned tax reforms or other fiscal stimulus is high.
There are also the hazards associated with growing trade protectionism, fears that higher oil prices could derail the global economic recovery, and the possibility that fallout from the Brexit could be far greater than expected.
The severity of these threats is worsened by the high degree of geopolitical risk that currently exists.
Tensions on the Korean peninsula remain heightened. The latest push by Trump to impose additional sanctions and cut off oil supplies to the isolated regime could spark another round of posturing from leader Kim Jong-un about North Korea’s ability to launch nuclear strikes against the continental U.S.
Conflict-ridden Venezuela appears to have defaulted on its national debt. This, along with growing internal strife as well as an economy close to collapse, could cause the country to implode.
Tensions in the Middle East remain high as the power struggle between Sunni Saudi Arabia and Shiite Iran escalates. Both are engaged in regional proxy wars in Yemen as well as Syria, and the cold war between both has escalated sharply in recent weeks as they eagerly extend their regional influence.
If any of these clashes were to escalate into a confrontation, it could easily trigger events that could snowball into a full-blown economic and political crisis. Were that to occur, investors would flock to gold, because it is widely recognized as a safe-haven asset during times of severe crisis.
So what?
In such a scenario, gold would easily break through US$1,300 per ounce which would be a boon for gold miners and streaming companies. One that stands out is streamer Osisko Gold Royalties Ltd. (TSX:OR)(NYSE:OR). At the end of July 2017, it completed the needle-moving $1.1 billion acquisition of a diversified portfolio of 74royalties, streams and precious metal offtakes from Orion Mining Finance.
For the third quarter 2017 it reported record gold production of 16,664 ounces which was a massive 65% increase compared to a year earlier. While earnings for the quarter were weak, this can be attributed primarily to the costs associated with the Orion deal. Once fully bedded down, Osisko Gold Royalties will receive a healthy bump, which should see its stock appreciate further. While investors wait for this to occur, they will be rewarded by its regular dividend, which yields 1%.
