Skip to Content
Stocks

More Room for Gold Miners to Fall

We continue to believe consumer demand means gold has a promising future, but there is still downside risk for the commodity and the miners in the near term.

Gold has remained relatively steady in the low- to mid-$1,300 per ounce range over the past few months, holding onto the massive gains from earlier this year. However, through mid-afternoon Oct. 4, gold has fallen more than 3% to roughly $1,270 per ounce as the U.S. Federal Reserve looks likely to raise rates by the end of 2016. As a result, gold miner stocks have fallen by roughly 10% or more.

Based on Fed Fund futures prices, the market is currently pricing in 55% probability of one rate hike and 8% probability of two rate hikes by the end of 2016. The market currently prices in 37% probability of no rate hikes through the end of the year, compared with roughly 60% just a couple of months ago. In addition, the latest Federal Open Market Committee "dot plot" shows most participants currently expect at least one rate increase by the end of 2016 and two hikes in 2017.

As we have stated throughout the year, we believe that the investment-driven rally this year had been built on a shaky assumption that real interest rates would remain accommodative to gold for an extended period of time. While we expect a higher interest rate environment will weaken the attractiveness of gold as an investment, we still believe gold has a promising future of consumer demand and forecast a nominal gold price of $1,300 per ounce in 2020. We expect that in the long term, Chinese and Indian jewelry demand will fill the gap left by investment demand. However, the rise of consumer demand will take time, which means significant downside risk in the near term.

As a group, gold miners remain relatively overvalued. While we see upside for

One company we are cautious on is

On the other hand,

More on this Topic

Sponsor Center