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Gold had a volatile 2017, but finished the trading year with some momentum and quietly chalked up its best return since 2010.
Gold stocks, however, haven’t tagged along for the ride, and contrarian investors are wondering if this is the time to finally buy the miners.
Let’s take a look at the current situation to see if gold could be a top bet for 2018.
At the time of writing, gold is trading for US$1,310 per ounce, up more than US$70 from the December 2017 low. The move is catching many pundits by surprise, as rising expectations for additional interest rate hikes should be negative for the yellow metal as we start 2018.
What’s going on?
The U.S. Federal Reserve raised rates three times in 2017, and is currently expected to repeat the moves in 2018. Higher interest rates in the United States tend to be negative for gold because they increase the opportunity cost of holding the non-yielding metal.
In addition, rising rates often provide a boost to the value of the American dollar, although that was not the case in 2017. The greenback actually lost ground against several key currencies over the course of the year, despite the rate hikes.
The other factor that has historically impacted the gold trade is safe-haven buying. Investors and traders often turn to gold when there is concern about geopolitical instability or threats to the financial markets.
North Korea is back in the headlines, so that might be providing some support, but overall, there isn’t much investor fear these days. The stock markets are near all-time highs; the U.S. just implemented a tax plan that should drive equities higher next year, and global growth is humming along quite nicely.
One reason for gold’s recent surge could be the recent pullback in the value of cryptocurrencies, which have enjoyed stellar rallies in 2017.
There is a theory that much of gold’s weakness in Q4 came as a result of investors shifting funds out of the precious metal and into cryptocurrencies. As investors take profits and wait to see where things go next, some of the money might be flowing back into gold.
If the cryptocurrency bubble pops in a big way, pundits are speculating that gold demand could soar in 2018.
Which stocks should you buy?
Major players such as Barrick Gold Corp. (TSX:ABX)(NYSE:ABX) are trading near their 2017 lows, despite the rally in the price of gold.
In fact, at the time of writing, Barrick can be picked up for $18 per share. Back in April, when gold was trading at US$1,280, Barrick was trading for more than $26.
The company is making good progress on its turnaround efforts, and even raised the dividend earlier this year. Debt is being paid off at a rapid pace, all-in sustaining costs are some of the lowest in the industry, and Barrick remains the top producer.
You have to be a gold bull to buy any of the miners, but if you fall into that camp and believe that 2018 is going to be a breakout year for the yellow metal, then Barrick should be on your radar.
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Fool contributor Andrew Walker owns shares of Barrick Gold.