2022-09-29 12:22:13
Gold appears to be an unpopular investment option at its current price of more than $1,670 per ounce, having fallen by almost 7% year to date and by around 16% from recent highs reached in March. Central banks worldwide have raised interest rates to tackle growing inflation. As a result, the value of safe-haven assets such as the US dollar and government rates has risen, putting downward pressure on commodity prices such as gold.
Investors Are Holding Gold in Anticipation of a Price Increase
However, according to one gold market professional, now is not the time to sell your core gold holdings, as the Fed has clarified that economic instability is on the way.
Senior gold strategist George Milling-Stanley of State Street Global Advisors recently told Kitco News that gold prices may continue to encounter headwinds as long as three sectors of the American economy display resilience, even as the Federal Reserve maintains its aggressive monetary policy approach.
The gold market is being constrained by three factors: relatively robust consumer demand, a reasonably healthy equity market, and solid advances in the US dollar, which is trading around its strongest level in more than two decades.
“Right now, the gold market isn’t in charge. Until we see these conditions change, gold’s prospects are going to remain somewhat limited,” he said.
According to Milling-Stanley, the selloff has been minor compared to the rallies seen over the last 13 years, even though the equity markets have been in a continuous slide for much of the year, with the S&P in bear-market territory, down 21%.
Milling-Stanley said that investors should maintain their core gold holdings despite investment demand being weak for much of 2022. This is due to the impending economic collapse caused by increasing interest rates.
“Inflation is still worryingly high, and Powell has made it very clear that he is going to have to cause some pain to the economy to bring it down,” he said. “We face a lot of macroeconomic and geopolitical uncertainty and in this environment, I certainly would not be selling my safe-haven assets. At these prices, I would be looking to add to my core position, which is something I think we are seeing.”
According to Milling-Stanley, one reason gold has maintained critical long-term support at around $1,675 is the prospect of an economic downturn and recession. On the other hand, Milling-Stanley remarked that he does not expect gold prices to fall any further, even if gold prices may struggle to rise through the end of the year.
“The selloff in gold we have seen is from weaker hands of speculators who thought gold was going to move back up through $2,000. We have shaken a lot of those weaker hands out and are left with investors who are holding on to core strategic allocations. Those aren’t going anywhere,” he said. “The world is still a very uncertain place and that is exactly when you want to have some exposure to gold.”
Milling-Stanley commented on gold after the Federal Reserve raised interest rates by 75 basis points on Wednesday. The Fed Funds rate is expected to peak at 4.6% in 2023, as announced by the Central Bank, along with the hefty rate hike.
Despite this, Milling-Stanley says that the most recent economic estimates may not be taken seriously. He said that the Fed will keep raising interest rates until inflation is under control and that the Fed has not yet reached peak hawkishness.
“Nobody knows where interest rates are going. Powell is right to sound hawkish and continue to tell the market that he is going to deal with inflation and that his target of 2% is unconditional. At some point, the market is going to believe him and that is when the pain comes,” he said.
Barrick Gold Stock Price May Rise in the Medium Term
As gold prices have declined, Barrick Gold Corporation (NYSE:GOLD) stock has fallen roughly 21% this year, in line with the S&P 500. The gold market drives the stock price of Barrick, accounting for more than 90% of the company’s revenue.
Ten-year government bond yields in the United States recently reached 3.5%, the highest level in a decade. Energy cost increases and supply chain interruptions are also putting a strain on Barrick’s cost base.
Despite this, we believe it is worthwhile to explore Barrick stock despite its recent decline. Following a dramatic slide from over 24x levels in the 2020s, the company sells at around 12x consensus 2022 profits.
Given the global economic downturn and increased macro-uncertainty, gold prices may rise in the medium term. The United States’ GDP has declined for two quarters, and consumer confidence has been poor. Concerns have also been expressed that Russia, whose military has sustained significant losses this month, may opt to escalate its conflict with Ukraine. These developments may raise gold demand, benefiting Barrick Gold, the world’s largest gold producer.
Given how well it has delivered on its balance sheet in recent years, Barrick stock appears to be in a solid position to weather a potential recession and increasing interest rate environment. With debt paid off, the firm ended the second quarter with a net cash position of more than $600 million.
The move of Barrick Gold to expand its copper activities may increase the value of the company’s stock. The company’s revenues are less than 10% of Barrick’s total, although it is rapidly expanding. The company claimed it was on track to exceed its annual copper production guideline ranges of 420-470 million lbs in Q2 2022, with output increasing by 25% year on year to 120 million lbs. Copper consumption is likely to rise in the long run as the global economy shifts away from hydrocarbons and toward alternatives such as renewable energy and electric vehicles, both of which rely heavily on copper.
Because copper typically co-occurs with gold in large-scale deposits, Barrick gold stock is likely to outperform other copper miners. Despite a year-over-year drop in copper prices, the company’s solid copper output resulted in somewhat better-than-expected Q2 2022 results, with earnings per share of $0.27, up from $0.23 the previous year.
Our price target for Barrick Gold stock is $21, which is 40% higher than the current market price.
