Gold Bears Are Pounding the Table Again
Before the Federal Reserve’s latest policy meeting, gold enjoyed an unblemished start to the new year. The precious metal outperformed every asset class and started to gain momentum for the first time in recent history. However, the price of gold is struggling in the wake of the central bank’s outlook, and bears are once again pounding the table.
Last week, the Federal Reserve decided to keep dialing down its monthly bond purchases by $10 billion. Starting in April, the central bank will purchase agency mortgage-backed securities at a pace of $25 billion per month and longer-term Treasury securities at a pace of $30 billion per month. Furthermore, Fed Chair Janet Yellen revealed — perhaps mistakenly — that interest rates could start to rise “around six months” after quantitative easing ends.
Since low interest rates are often cited as a catalyst for higher gold prices, Yellen’s statement provided more ammo for the bears. Goldman Sachs reiterated its negative stance on gold and said the recent rally will not last. The investment firm believes the rally was built upon a weather-driven slowdown in the United States, high Chinese credit concerns, and escalating tensions over Ukraine. Goldman Sachs has a year-end price target of $1,050 per ounce. Earlier this year, HSBC lowered its 2014 outlook on gold from $1,435 per ounce to $1,292 per ounce.
“Our base-case forecast remains for a sequential acceleration in both U.S. and Chinese activity, and hence for gold prices to decline,” said Goldman Sachs in a research note. “While we believe that it may take several more weeks to lift the uncertainty around this acceleration, the more hawkish-than-expected March FOMC is likely to weigh on gold prices in the short term. Admittedly, a rebound in US and Chinese growth this spring is a consensus view and a disappointment in either would lead us to delay our expected decline in gold prices. However, it would require a significant sustained slowdown in US growth for us to revisit our expectation for lower US gold prices over the next two years.”
Negative sentiment surrounding gold is nothing new. In fact, many investors use it as a contrarian indicator. Gold was the most-hated asset in the market last year, but the precious metal and related miners ripped higher this year. In the first two-and-a-half months of 2014, shares of the SPRD Gold Trust (NYSE:GLD) jumped nearly 15 percent, while the Market Vectors Gold Miners Index (NYSE:GDX) surged 31 percent. The junior gold miners performed even better.
Despite the pullback in precious metals over the past week, some market participants believe quality miners offer good value. RBC analyst Dan Rollins recently noted: “Quality stocks provide the potential for greater long-term risk-adjusted returns and reduced potential for ongoing margin erosion. Our preferred names are those companies that offer a combination of lower cost operations, strong balance sheets, financial flexibility, improving free cash flow prospects, funded growth projects, track record of operational consistency, attractive valuations, and consistent corporate strategies.” Miners such as Yamana Gold (NYSE:AUY) and Goldcorp (NYSE:GG) fit this description.
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Disclosure: Long EXK, HL, PHYS