article 3 months old

Treasure Chest: Why Gold Stocks Could Be Ready To Rally Strongly

Treasure Chest | Jul 29 2015

By Greg Peel

With spot gold currently sitting around US$1095/oz, above technical support at US$1082/oz, Canaccord Genuity’s gold analysts cannot rule out a test of the US$1000/oz level. However the analysts believe gold will shift from a deflation trade to an inflation trade over the next year.

Those bearish gold argue two significant drivers. The upcoming Fed tightening cycle will lead to further strengthening in the US dollar, thus reducing the US dollar gold price, and a slower Chinese economy will lead to weaker demand for physical gold. But Canaccord argues differently.

With regard Fed policy, it must be noted that the first Fed rate rise has been anticipated for some time now and given a drop-off in the level of US stock market volatility directly attributable to every economic data release, good or bad, and every offhand comment from a Fed official, hawkish or dovish, one might suggest the first hike is now “baked in”. The US dollar has already rallied, and the gold price has already fallen.

Assuming the Fed makes its first move in September, Canaccord argues that the end of the expectation phase and a simultaneous “talking down” from the Fed of future rate hike expectations, and thus US dollar expectations, could actually be gold bullish.

On the demand side, while Chinese demand may not be as strong as it has been, Canaccord reminds us that August-September is the most seasonally positive for the gold price, which relates to demand from both China and India during their respective holiday festivals.

Furthermore, the net speculative long position in Comex gold futures has fallen to 2.8moz, which is the lowest level since late 2013. The past two years have seen two previous occasions when net longs fell to such depressed levels, and on each occasion the gold price responded with a 16% rally.

From the point of view of gold producers, Canaccord notes North American gold stocks have already underperformed GLD, the physical gold ETF, by 22%, which is the most in ten years. Working backwards from gold producer valuations suggests the market is pricing in US$1029/oz gold.

Put it altogether and Canaccord suggests “capitulation has arrived”. The risk/reward balance in owning gold stocks has swung to favourable, in the analysts’ view.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Share on FacebookTweet about this on TwitterShare on LinkedIn

Click to view our Glossary of Financial Terms