Kristoffer Inton: Gold has rallied to more than $1,300 per ounce from $1,150 at the start of the year, but we see limited fundamental support for its rally.
Breaking a long trend, demand for gold jewelry in China and India has plummeted in recent years. But despite this massive decline in the largest single source of gold demand, prices have risen, largely due to strong investor demand. In the face of ongoing interest-rate hikes by the U.S. Federal Reserve, ETF holdings have risen to levels last seen in 2013. However, continued rate hikes threaten to reverse near-record ETF inflows, as still-manageable inflation would push real interest rates well above levels that attract investor interest.
We expect gold prices to fall through 2018, before increased Chinese and Indian jewelry demand catalyzes a rebound. Investor outflows can strike suddenly, but a full recovery in jewelry sales will take time.
As a group, gold miner stocks look fairly valued, but shares would come under pressure if near-term gold market dynamics play out as we expect. Eldorado Gold is our top pick. The Greek government has once again interfered with the company's development projects. The market has virtually written off these projects, giving investors a free option on attractive new mines.