Gold prices have moved downward since the beginning of the fourth quarter of 2019 after a rally in the June-September period. Renewed hopes for the signing of an interim trade deal between the United States and China, and a stronger U.S. dollar are the primary reasons for the gold price decline.
Despite recent softness in price, gold has surged nearly 20% year to date and is on track to finish its best year in a decade. Will gold glitter in 2020?
Trade Tussle Continues
The phase-one deal between the United States and China needs to be signed by Dec 15, after which the U.S. government is scheduled to impose a new round of 15% tariffs on $160 billion of Chinese goods. The Trump administration can also raise the tariff rate on $250 billion of Chinese goods already under the 25% U.S. tariff system.
On Nov 29, Reuters reported that the U.S. government may exercise its power to stop more foreign shipments of products with U.S. technology to China’s telecom behemoth Huawei Technologies. Further, on Dec 10, The Wall Street Journal reported that the U.S. Congress is considering the introduction of a new bill aiming to restrict the use of government funds to purchase Chinese busses and railcars.
Trimmed Projections for Global Economic Growth
On Oct 15, The International Monetary Fund (IMF) reduced its 2019 and 2020 growth forecasts for the global economy. It predicts growth of 3% for 2019, down from its previous forecast of 3.2%. For 2020, the IMF projects growth of 3.4%, lower than its previous projection of 3.6%. Moreover, the World Bank also squeezed its global growth forecast for 2019 to 2.6% from the previously forecast 2.7% growth.
On Sep 19, the Organization of Economic Co-Operation and Development (OECD), projected that the world economy will grow just 2.9% in 2019, the lowest since 2009. The OECD had forecast 4% global growth in 2019 just 18 months ago.
Easy Monetary Stance Adopted by Major Central Banks
Reversing its highly hawkish monetary stance of 2019, the Fed adopted a dovish stance since the beginning of this year and reduced the benchmark interest rate by 75 basis points in three tranches. On Dec 12, Fed Chair Jerome Powell reiterated that the central bank is set to maintain a stable monetary policy in 2020 and can only think about raising rates if inflation surges systematically.
The European Central Bank has also decided to maintain a negative interest rate policy and continue its bond purchase or quantitative easing strategy. Moreover, Bank of Japan is also maintaining negative interest rate. Central banks of major emerging economies including China, India, Australia, Thailand and New Zeeland have also adopted low-rate policies.
Lower interest rates decrease the opportunity cost of holding non-yielding bullion, making gold cheaper for investors holding other currencies. Buying pressure on gold is likely to remain firm as investors will focus on precious metals as a store of wealth and hedge against market turmoil.
On Dec 12, gold price for February futures on Comex settled at $1,471.20 per ounce. According to a recent report by Goldman Sachs, wealthy people are stocking up on physical gold, as in bullion, coins and bars. The research firm raised its target price for gold to $1,600 per ounce in 2020. Heritage Capital projected gold price in the range of $2,500, $3,000 an ounce in the 2020 citing recession concerns and political uncertainty.
Our Top Picks
At this stage, it will be prudent to invest in gold stocks with strong growth potential. We have narrowed down our search to five such stocks, which have skyrocketed year to date and still have upside left for 2020. Each of these stocks carries either a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The chart below shows price performance of our six picks year to date
Kirkland Lake Gold Ltd. KL is engaged in the provision of mining and mineral exploration. It focuses on gold assets primarily in Canada and Australia. The company has an expected earnings growth rate of 23.4% for next year. The Zacks Consensus Estimate for next year has improved by 19.9% over the last 60 days. The Zacks Rank #1 stock has jumped 62.3% year to date.
Yamana Gold Inc. AUY is engaged in operating mines, development stage projects and exploration and mineral properties primarily in Canada, Brazil, Chile and Argentina. It primarily sells precious metals, including gold, silver, and copper. The company has an expected earnings growth rate of 57.5% for next year. The Zacks Consensus Estimate for next year has improved by 63.6% over the last 60 days. The Zacks Rank #1 stock has soared 57.2% year to date.
Franco-Nevada Corp. FNV is a gold-focused royalty and stream company with additional interests in platinum group metals and other resource assets. The company has an expected earnings growth rate of 25.4% for next year. The Zacks Consensus Estimate for next year has improved by 7% over the last 60 days. The Zacks Rank #2 stock has surged 40.4% year to date.
Agnico Eagle Mines Ltd. AEM is engaged in the exploration, development and production of mineral properties in Canada, Mexico and Finland. It primarily produces and sells gold deposit, as well as explores for silver, zinc, and copper deposits. The company has an expected earnings growth rate of 89.5% for next year. The Zacks Consensus Estimate for next year has improved by 19.2% over the last 60 days. The Zacks Rank #2 stock has climbed 51% year to date.
Sibanye Gold Ltd. SBGL operates as a precious metals mining company in South Africa, the United States, Zimbabwe, Canada and Argentina. It produces gold, palladium, platinum, rhodium, iridium, ruthenium, nickel, copper and chrome. The company has an expected earnings growth rate of 280.5% for next year. The Zacks Consensus Estimate for next year has improved by 24.8% over the last 60 days. The Zacks Rank #2 stock has rallied 229.7% year to date.
B2Gold Corp. BTG is engaged in the exploration and development of mineral properties for gold deposits in Nicaragua, the Philippines, Mali, Colombia, Burkina Faso and Namibia. The company has an expected earnings growth rate of 80% for next year. The Zacks Consensus Estimate for next year has improved by 20.6% over the last 60 days. The Zacks Rank #2 stock has advanced 28.1% year to date.
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