Gold continues to move higher, and fans of the yellow metal are wondering if this might be the beginning of a prolonged rally that could take the price back to the 2011 highs.
Let’s take a look at the current situation to see if this might be a good time to add gold stocks to your portfolio.
Tailwind
Gold now trades at US$1,325 per ounce, representing a gain of US$125 since early October 2018. The nearly four-month surge was not expected even six months ago, but pundits are now eyeing the 2018 high around US$1,360 as the next target. If gold manages to break through that level in the next couple of months, it could pick up some strong momentum through the rest of 2019.
A number of factors are currently in play, and each one has the potential to drive gold much higher.
Interest rates
The U.S. Federal Reserve just announced no change to interest rates and has adjusted its tone to adopt a more measured approach regarding additional rate hikes. The Fed raised interest rates four times in 2018, and most analysts originally anticipated another three moves to the upside in 2019.
Now, the market is of the mind that we might not see any increases this year, and some pundits even expect the next move to be a cut.
What happened?
The ongoing trade dispute between China and the United States is starting to have an impact on both economies. China’s growth has slowed to a pace not seen in nearly three decades. This risks hitting the global economy, and the Fed is concerned it might push the U.S. into a recession if it raises rates from the current level.
Gold buyers are hedging against an economic downturn and a potential rough ride for equity markets that would follow. Near-term momentum on gold could increase if China and the United states can’t hammer out a deal and subsequently impose additional tariffs.
In Europe, the U.K. is scheduled to leave the European Union in the coming weeks and a no-deal Brexit is looking more likely. If that actually occurs, gold could see a wave of new buying amid fears about the unknown effect on the U.K. and European economies.
Furthermore, recent data just came out showing strong gold buying from central banks in 2018, led by Russia as it dumped U.S. treasuries and put the funds in gold. In fact, countries bought more gold in 2018 than in any year since 1971. The news could extend the recent downward pressure on the American dollar, and that should be positive for gold, as it makes the yellow metal cheaper for holders of other currencies.
Could gold rise another 50%?
A surge to a new high would require a major financial shock or a geopolitical crisis. Both situations would have been off the radar a year ago, but things have changed, and money is starting to seek out safety. If the trickle into gold becomes a flood, we could see significant rally, and a run back to US$1,900 shouldn’t be automatically ruled out.
Should you buy gold stocks?
The gold miners tend to gain more than gold itself in situations where the yellow metal rallies. At the moment, many of the top names remain cheap compared to historical prices when gold was much higher. Barrick Gold (TSX: ABX)(NYSE: GOLD), for example, was a $50 stock in 2011. Today investors can pick it up for $17 per share. The company just closed its takeover of Randgold and recently raised the dividend. Given the size of the production base and the low production costs, the company could generate significant free cash flow on higher gold prices.
If you are a gold bull, this might be a good time to put some gold stocks in your portfolio.
Other opportunities are emerging that also deserve to be on your radar this year.
