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Will Precious Metals Sparkle Again?

3 September 2015 in Trading Ideas

A month that saw stocks fall by their largest percentage in nearly five years has coincided with the price of gold jumping nearly 8 percent before falling off as markets stabilized toward the end of last week.1

Since the yellow metal had spent most of 2015 selling off, the question for investors is whether gold’s recent advance has any more life in it.

Amid the recent volatility in equities, many gold and precious metal stocks have outperformed. The Precious Metals motif gained 4.8 percent in the past month. In that same time, the Standard & Poor’s 500 lost 5.8 percent.

So far in 2015, the motif has lost 49.6 percent; the S&P 500 is down 3.8 percent.

In the past, investor interest in gold has increased with uncertainty over monetary policy that might influence the value of the dollar. Whether that pattern will continue remains to be seen amid recent shifts in analyst consensus estimates about the timing of the interest rate increase by the U.S. Federal Reserve.

Remarks by Federal Reserve Vice Chairman Stanley Fischer over the weekend created the impression the central bank would stick to its plan to raise rates before the end of the year despite the recent pronounced swings in global markets.2

While analysts at RBC Capital Markets recently decreased their long-term target for gold prices, they do see possible improvement over the near and long term. The former appears driven by seasonal demand from India and latter by fundamental demand out of China and emerging market countries, as well as steady central bank buying.3

In a recent report, RBC Capital said it saw seasonal gold demand picking up into the Indian wedding and festival season—the focus of which should be around the festival of Diwali in November.

Chinese demand should also pick up in early 2016 ahead of the country’s new year, on February 8, according to RBC’s report.

In addition, RBC said that “a deferral of the expected September Fed rate hike or an increase in systemic risk due to: 1. A resurgence of the Greek economic risk within the Eurozone through or 2. Further Chinese devaluation of the [Yuan] could also improve sentiment and result in a firmer gold price.”

And with inflation expectations (or the lack thereof) discounted into lower oil prices, if oil starts were to approach $70 or $80 a barrel over the next 12 months, the resulting pick-up in inflation expectations and headline inflation could also lift gold demand as an “inflation hedge,” RBC said.

If the above scenario were to take place (and barring significant offsetting headwinds), RBC estimates gold might approach $1,300 in late 2015 or early 2016.

With the metal currently around $1,130, a 15 percent near-term jump could prove beneficial for investors in gold stocks.

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Investments in commodity-related products, such as precious metals, agricultural products, and oil may be subject to greater volatility and liquidity risks than investments in traditional securities. Commodity-related products can be significantly impacted by underlying commodity prices, world events, government regulations, and economic conditions, which can dramatically affect the value of an investment.

1 Valketkevitch, Caroline, “Stocks Drop on Fed Concerns; U.S. Oil Jumps 8.8 Percent,” Reuters, August 31, 2015.
2 Fischer, Stanley. “U.S. Inflation Developments,” FederalReserve.gov, August 29, 2015.
3 RBC Capital Markets, “Can Gold Rally to $1,300?” Barron’s, August 24, 2015.