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Gold prices slumped to a ten-month low after the U.S. Federal Reserve finally raised interest rates for the first time in 2016 citing improvement in the labor market and a strengthening U.S. economy. The Fed also signalled faster pace of hikes next year.
Rate Hike Batters Bullion
As widely expected, the Fed raised benchmark interest rates by a quarter of a percentage point to 0.5%-0.75% from 0.25%-0.5%, only the second hike in a decade. The central bank also hinted three rate hikes in 2017, up from the prior expectations of two. The Fed, in its statement, said that economic growth has picked up since mid-2016 and the labor market continued to strengthen.
Household spending continues to rise at a moderate pace while job gains have been strong of late, the Fed statement noted. But it added that business investment remains weak. Moreover, inflation (an important determinant of interest rates) has picked up since earlier this year and is expected to rise to 2% over the medium term as the temporary effects of declines in energy and import prices mitigate, per the statement. The Fed also stated that near-term risks facing the economy appear “roughly balanced.”
Gold prices for February delivery on the Comex division of the New York Mercantile Exchange closed 2.9% lower at $1,129.80 a troy ounce yesterday, the lowest level since Feb 2, as the rate hike knocked the wind out of the yellow metal. Gold traded as low as $1,124.30 on Wednesday following the Fed announcement.
Higher interest rates have a bearish effect on gold as it provides no yield and the metal has to struggle to compete with interest paying assets in a climate of rising borrowing costs. Moreover, prospects of a more-hawkish stance from the Fed next year weighed on gold. President-elect Donald Trump’s proposed tax cuts, deregulation and fiscal stimulus are likely to spur economic activity and trigger a rise in inflation, which could prompt the central bank to further increase rates.
Gold’s decline was also triggered by a surge in the U.S. dollar that hit a 14-year high on the combined impact of the rate increase and expectations of more hikes next year. A hike in interest rates boosts the dollar and weighs on precious metals, including gold. It is a well known fact that there is an inverse relationship between the greenback and the price of gold.
Gold prices broke above the $1,300 per troy ounce level in Jun 2016 after Britain voted to leave the European Union (EU). The market-shattering move sparked as much as around 8% surge in the metal’s prices to trade at levels last seen in Jul 2014.
However, after making the most of market panic post Brexit, gold seems to be losing its sheen once again. The yellow metal lost 8% of its value in Nov 2016, the worst monthly performance since Jun 2013. With this, the strong run gold enjoyed this year, came to an abrupt end. The double-digit gains that the yellow metal saw before November have now diminished to a roughly 6.5% gain.
Demonetization Hurting Indian Demand
Another factor that has dealt a body blow to gold of late is the fading retail demand in India, the world’s second-biggest gold consuming nation. The country is a major buyer of the metal during this time of the year due to the wedding season.
However, the Indian government’s move to demonetize high denomination currency notes last month in a bid to crack down on unaccounted wealth has hit the Indian gold industry hard. The subsequent cash crunch triggered by demonetization has left in the lurch a large section of Indian society, including farmers. The farming community accounts for bulk of gold purchases in the country. Retail demand is expected to remain low over the next few months in India due to the ongoing cash crisis and concerns that the government might curb domestic gold holdings.
Gold Stocks to Steer Clear Of
The prospect of a brisker monetary tightening is likely to remain a major source of headwind for gold in the near term. In case the slump in gold continues amid an unsupportive environment, it will be a prudent move to get rid of certain gold mining stocks that are suffering negative estimate revisions and carry an unfavorable Zacks Rank.
For that we have screened gold mining stocks that either have a Zacks Rank #4 (Sell) or a Zacks Rank #5 (Strong Sell) and also have witnessed downward estimate revisions. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
AngloGold Ashanti Ltd. AU
Headquartered in Johannesburg, South Africa, AngloGold Ashanti operates as a gold mining and exploration company. AngloGold currently carries a Zacks Rank #5. Its estimates for the current fiscal have gone down 26% over the past 90 days.
Richmont Mines Inc. RIC
Richmont engages in the mining, exploration, and development of mining properties in Canada. It has operations in Quebec, Ontario and Newfoundland and holds interests in the Francoeur Mine, Beaufor Mine and Camflo Mill in Quebec, and the Island Gold Mine in Ontario. The stock carries a Zacks Rank #5. The Zacks Consensus estimate for the company has suffered a 34% drop over the past 90 days.
Harmony Gold Mining Company Limited HMY
Based in Randfontein, South Africa., Harmony Gold Mining is engaged in the exploration and mining of gold in South Africa and Papua New Guinea. Harmony Gold currently carries a Zacks Rank #4. Its estimates for the current fiscal have gone down 31% over the past 90 days.
Yamana Gold, Inc. AUY
Headquartered in Toronto, Canada, Yamana Gold engages in gold mining and related activities, including exploration, extraction, processing, and reclamation. The company has precious metal properties and land positions in the Americas. The stock currently carries a Zacks Rank #4. The Zacks Consensus Estimate for the current fiscal has declined 41% over the past 90 days.
Gold Fields Ltd. GFI
Based in Sandton, South Africa, Gold Fields is an unhedged, globally diversified producer of gold with eight operating mines in Australia, Ghana, Peru and South Africa. The company currently carries a Zacks Rank #4. Its estimates for the current fiscal have gone down 31% over the past 90 days.
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ANGLOGOLD LTD (AU): Free Stock Analysis Report
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