It is all but a given that the Federal Reserve will raise the federal funds rate by 25 basis points, or one-quarter of 1%. It is also thought that over the course of 2018, the Fed will raise it three more times, and some are now saying perhaps even four times.
The goal of the increases is to get rates back to more normal levels and to choke off any potential spike in inflation. With the economy finally perking up, and consumer confidence soaring, you can bet that the probable rate hikes for 2018 are in the cards.
One very interesting trend over the past few years is the price of gold spiking when the Federal Reserve raises rates. RBC analysts have spotted this activity and noted this in a new research report:
Following the Fed rate hikes in December 2015 and 2016, the gold price rallied 15% and 8%, respectively, over the subsequent three-month period. We have also seen a strengthening in gold price following the most recent Fed rate hikes in March and June this year by 3% and 5%, respectively, over the same period. Our RBC Economics team currently anticipates another Fed rate hike to be announced at the upcoming FOMC meeting on December 13, 2017, which in our view could present a buying opportunity for investors on any share price weakness.
RBC is one of the better Wall Street firms when it comes to covering precious metals, so we screened its coverage universe and found four stocks it rates at Buy that may be outstanding buys now.
This top company with a solid balance sheet makes sense for investors to consider. Goldcorp Inc. (NYSE: GG) engages in the acquisition, exploration, development and operation of precious metal properties in Canada, the United States, Mexico and Central and South America. It primarily explores for gold, silver, copper, lead and zinc deposits.
Goldcorp’s principal mining properties include the Red Lake, Éléonore, Porcupine and Musselwhite gold mines in Canada; the Peñasquito and Los Filos mines in Mexico; the Marlin property in Guatemala; the Cerro Negro and Alumbrera mines in Argentina; and the Pueblo Viejo mine in the Dominican Republic.
Some Wall Street analysts feel that the company deserves a premium valuation to its peers due to its excellent balance sheet, growth profile with lower cost new mines, longer average mine life and a solid dividend yield. Over the past few years, Goldcorp has been altering its mine plans, cutting spending and disposing assets in order to reduce costs and focus on the most profitable production.
Goldcorp reported earnings for the third quarter that were in line with the Wall Street consensus. The company maintained its 2017 operating guidance and highlighted solid progress at achieving its 20-20-20 strategy. Goldcorp also bumped up reserves 26% to 53.5 million ounces with increases from Century of 4.7 million ounces and Cerro Casale and Caspiche providing 13.3 million ounces.
Goldcorp shareholders are paid a small 0.61% dividend. The RBC price target for the shares is $17, and the Wall Street consensus target is $17.25. The shares closed Tuesday’s trading at $11.76 apiece.
More aggressive investors may want to consider this smaller cap company. Kinross Gold Corp. (NYSE: KGC) engages in the acquisition, exploration, development and production of gold properties. The company’s gold production and exploration activities are carried out principally in Canada, the United States, the Russian Federation, Brazil, Chile, Ghana and Mauritania. It also produces and sells silver.
Kinross recently announced that it will proceed with the Tasiast Phase Two and Round Mountain Project W projects. At full production by 2020, CEO Paul Rollinson sees these two projects stabilizing the company’s gold equivalent output in the 2.5 million ounce range. Trading at a discount to the peer producers, some believe that this valuation gap could be closed due to these projects.
RBC has a $5.50 price objective on the stock. That compares to the posted consensus target of $5.31 a share. The stock closed most recently at $3.80 per share.
JANUARY NEWSLETTER 1
GOLD TREND FOR 2018
GOLD COULD RALLY BIG
If you have been listening to the financial media in November and December of 2017, you might think that the only thing that matters in the world of currencies and commodities is bitcoin and cryptocurrencies. It turns out that gold and other stores of value still matter. In fact, technology use, central bank buying and even investor demand have kept the price of gold up in 2017. Sure, gold may be down 5% from its September peak and closer to $1,255 now, but gold is still up almost 9% so far in 2017, with just about two weeks to go before year’s end.
We also have several other issues to consider. Interest rates have been raised three times by the Federal Reserve. The bull market in equities likely has eaten at some of the money that would have bought gold. And bitcoin has rallied exponentially, with many cryptocurrencies up 1,000% to 2,000%.In the World Gold Council’s initial 2018 Outlook for Gold, the group sees several reasons to believe that gold could maintain an upward trajectory in 2018.It should be noted that the World Gold Council is of course “pro-gold” in its views. That caveat aside, there have been other years when the council offered up far less positive support than it is offering up as a view for 2018.John Reade, chief market strategist at the World Gold Council, thinks that gold price performance has been particularly noteworthy for a year in which the United States has been hiking rates and equities have remained in favor. Gold’s trading range also has been relatively narrow and its price moves have been deemed to be orderly.A driving force for gold in 2018 likely will be monetary policy, with the Federal Reserve expected to hike interest rates further next year at the same time that it will shrink its massive $4.5 trillion balance sheet. Another issue on policy to consider is that the change of about half of the regional Federal Reserve heads and a new Fed chair may change how the Fed acts and communicates. Reade noted:
Jerome Powell, nominated as the next Fed chair, recently aired his views on Fed communications and any changes that he makes could lead to a period of adjustment by fixed income and other markets. Other staff will change too, most interestingly the suggestion that Mohamed El-Erian – a known supporter of gold as an investment asset – may become vice-chairman.Another driver may be the European Central Bank’s extraordinary monetary policy action, and even the Bank of Japan may dial down on its previously endless quantitative easing. A last monetary policy notation is about China potentially continuing its efforts to rebalance its growth and to remove some of the leverage in key sectors.24/7 Wall St.
Gold Could Rally Big on Coming Fed Rate Hikes: 4 Stocks to Buy NowJohn Reade further said:With inflation still subdued around the world, we see monetary policy tightening as likely to be gentle, but there are risks, not least the Fed’s planned balance sheet reduction – the first time such an action has been attempted.Away from monetary policy, we view two other factors as potentially important for gold. First, the ongoing strength – or otherwise – of already expensive US equities. And second, the trajectory of the US dollar. We believe that the bull market in US equities has reduced gold’s appeal in 2017: an end to that trend could reignite demand for gold. The direction of the US dollar could also be important: if 2017 marks the end of a multi-year period of US dollar strength, gold could benefit from that tailwind, unlike the headwind that it has experienced since 2001.
Other drivers also remain favorable for gold’s outlook in 2018. Physical market trends, income growth, China avoiding a hard landing, the recovery of India’s economy, Germany’s strengthening economy, US jewelry demand, and technology use are addition drivers ahead. These could all spell solid support for gold in 2018.The World Gold Council’s initial 2018 outlook for gold also believes that structural changes in the gold market are worth noting, which may not be big factors in 2018 but could bring significant changes in the years to come. These are noted as potential VAT rate changes on gold bars in Russia, banks and mints continuing to develop Sharia-compliant gold products, and the move to develop a spot exchange in India. Also, any end to the bull market in equities would likely reignite demand for gold.
Comex gold traded at a three-month high early Tuesday morning at $1,314.50, lengthening its run of daily gains to eight consecutive days. On December 21, the yellow metal closed at $1,270.60, and at this morning’s high trade is up nearly 3.5% since then.The U.S. dollar index, which measures the strength of the greenback against a basket of six major currencies, was down 0.36% this morning at 91.66, its lowest level in three-months. For the year the dollar index fell 9.8%, its largest decline since 2003.As it stands, the same three-month period saw gold rise and the dollar fall, which is the way the markets are expected to work. Gold prices denominated in dollars rise when the dollar weakens because it takes more dollars to buy the same amount of gold.
What is not typical is a rise in gold prices along with a surging equities market and a monetary policy that included three interest rate hikes in the year and the promise of three more in the new year. Ordinarily if the Federal Reserve signals that interest rates will rise, we might expect gold prices to flatten, if not drop.That’s not what’s going on now. Jeffrey Halley, a senior market analyst at Oanda, said in a note cited by Bloomberg:As global complacency over the trajectory of U.S. rates continues to be astoundingly low, precious metals in general should continue to benefit. The old adage that the market can stay irrational longer [than] you can stay solvent appears to be alive and well in the gold market at the moment.
Gold’s relative strength index in Singapore this morning was 71.3, up from Friday’s level of 69.1. Anything over 70 usually indicates an impending price decline. Halley commented, “The relative strength index is now at very overbought levels.”The Fed releases Federal Open Market Committee (FOMC) minutes from its December meeting on Wednesday, and the report on nonfarm payrolls is due Friday. Maybe that will siphon off some of the irrationality in the gold market. But would you want to bet on that?24/7 Wall St.
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