Towards the end of the summer, gold hit its highest level in more than a year, as concerns around everything from interest rate increases to a stronger dollar encouraged investors to protect themselves. Oddly enough, however, recent geopolitical tensions have largely been ignored and have not set off a similar retreat to safer investments.
Gold, typically seen as a safe haven in uncertain times, has failed to attract much investor interest despite conditions that would historically support a “flight to quality.” We saw similar indifference just two years ago over China’s slowing growth and threats of interest rate normalization. Not much seems to have changed.
Gold is a counter-cyclical commodity that has a negative correlation to equity markets. That means when the things go awry, gold is probably your best bet. In the current environment, equity markets have been on an upward trajectory, with the S&P 500 increasing more than 18% in the last year. The U.S. dollar per-troy-ounce of gold is down 3.7% over that same time period. Other precious metals such as silver and platinum are also down year-over-year, at -3.7% and -5%, respectively.
All metals and mining companies benefit from low interest rates. In the last two years the Federal Reserve has raised rates four times, and suggested early on in the year that three raises in 2017 alone might be appropriate. There have only been two increases so far this year, but the Fed reiterated their intention to likely raise again in December, which has caused investors to shy away from gold.
Comments like these have helped bolster the U.S. dollar, which after a strong run in 2015 and 2016, hit multiyear lows in September. The U.S. Dollar Index, which compares the dollar to other major world currencies, has fallen nearly 3% in the last 12 months, but is starting to strengthen in the final quarter of the year. A stronger dollar makes gold more expensive for foreign buyers, thus translating into a dip in price for the precious metal.
While geopolitical risks such as increased tensions with North Korea have more or less been tabled for the time being, that doesn’t mean they couldn’t alarm investors in the near future and set off buying in gold. Other international factors like the stagnation of China’s growth, which has now been in a range of 6.7% to 6.9% since the fourth quarter of 2015, also have been worrisome. In the past, large economic swings in China didn’t have much impact on gold prices, but that may be changing. China is the world’s largest producer of gold and second-largest consumer behind India. That sort of demand has traditionally been bullish for gold prices, but if that demand dissipates it could have seriously negative implications.
Estimize covers 12 gold mining stocks, and despite the current slump, fundamental expectations for the second half of the year look impressive, mostly due to easy year-over-year comparisons. The group is expected to show an earnings per share (EPS) increase of 20% in the third quarter 2017 on a year-over-year basis, with revenues anticipated to come in at 5%. Expectations are even higher for Q4, with profits estimated to improve to 81% year-over-year and sales to jump to 10%, perhaps an indication that analysts believe the last quarter of the year will include a flight to quality.