There is no doubt 2016 has been a great year for gold. This is the years that gold prices sprinted to a 30-year high in 1Q2016 and gold stocks haven’t disappointed. But developments in the recent week have meant that gold investors are no longer at ease.
With the unraveling in the gold market in the recent week, the question is whether the time has come to jettison gold from your portfolio or the selloff in gold stocks has presented an opportunity to grab gold on cheap and wait for a rebound. If you are going to double down on gold investment, which stocks should you consider?
As to whether you should cut or increase your gold holding, everything comes down to your perception of the economy. Will the Federal Reserve stick with the schedule to raise interest rates in December? Will the European Central Bank keep pumping more money into the economy? Will a shorter Brexit timeline clear economic cloud in the Eurozone faster than originally anticipated? If you are of the view that there would not be meaningful improvement in the condition of the economy between now and the next Fed meeting, then you can go ahead with buying more gold stocks. The Fed will be deterred to raise interest rates at its December meeting if the quality of economic data coming out in the weeks and months leading up to the next policy meeting aren’t compelling enough.
In the event that the Fed maintains status quo with regard to lending rates adjustment, the slide in gold stocks should reverse as traders boost positions in safe-haven assets. Lower interest rates do not favor investment in risky but yield bearing assets such as bonds.
Why gold stocks got rattled
The downturn in gold stock was triggered by at least three unrelated developments. One of them was the issue of monetary easing in the Eurozone. The ECB hinted that it might cool aggressive supply of money into the economy earlier than many gold traders and investors anticipated.
The other issue that rattled gold stocks was hawkish comments by some Fed members about rate hike in December. Then there was the issue of Britain initiating the process of formal withdrawal from the European Union. The administration of PM Teresa May has set early 2017 as the time to begin formal withdrawal talks, which some see might shorten the Brexit timeline.
The three developments point to easing economic uncertainties that in the end lifted the dollar and boosted appetite for bonds. A stronger dollar hurts gold because it makes the yellow metal more expensive for foreign traders, thus hurting demand and prices of the commodity. Additionally, a return to bonds and other risky assets steals the spotlight from gold which doesn’t pay its holders anything other than the benefit of price appreciation.
Once bitten twice shy
Gold investors are not new to gold rallies that quickly fade, triggering losses in the process. Therefore, as soon as it appeared that gold rally was losing momentum, investors quickly pulled the trigger on gold, jumping on profit-taking trades and moving to the sidelines. In case you aren’t sure how to play gold amid the issues of ECB cooling easing, Fed raising rates in December and Britain finishing the Brexit business earlier than expected, investment advisers say you should just make sure you have some gold in your pocket regardless of how little it may be. You can call it gold hedging. If your portfolio isn’t golden already, perhaps the dip in gold stocks offers an opportunity to enter gold on cheap. But which stocks are good for you?
Newmont Mining Corp (NYSE:NEM) has done a great job in reducing its indebtedness and operating costs, which make them one of the appealing gold miners you might want to have in your portfolio. If you are looking for a gold miner subject to minimal political risk and has efficient operations then you can consider Klondex Mines Ltd (NYSEMKT:KLDX). The company’s efficient mines means that it can produce profitably even of gold prices were to dip to $800 an ounce. Barrick Gold Corporation (USA) (NYSE:ABX) is yet another attractive gold stock and Goldman Sachs analysts have a BUY rating on the stock, though they recently dropped it from their Conviction Buy list. Randgold Resources Ltd. (ADR) (NASDAQ:GOLD) is also a well-managed gold miner with efficient mines that can keep it profitable even of gold prices shrink to $1,000.
Another small cap gold mining stock that is gaining traction is Bullfrog Gold Corp (OTCMKTS:BFGC). Recently, Bullfrog Gold had announced additional land acquisition next to its Bullfrog Project in Nevada. While gold and the mining end of the business remains a mystery to many investors, those who watch the markets are looking for opportunities in domestic producing areas.
Bullfrog Gold Corp. is emerging as a junior gold stock with all the rights stimulus such as excellent land positions, experienced management and known domestic producing gold deposits already developed previously by majors. Looks like they have set the stage for great things on a domestic U.S gold situation that you have to see.
