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Surging Gold Prices Have Some Gold Stocks Aiming For Historic Highs

Gold stocks soared on Wednesday after the price of gold ran to nearly 7-year highs during premarket trading. Gold futures broke above $1,614 for the first time since March of 2013. Some analysts like James Gerrish, portfolio manager at Shaw and Partners, credit the rise to portfolio hedging. This is in contrast to some who have attributed gold’s move to fears about the coronavirus’s impact on global economics.

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Whatever the case may be, the fact remains that gold prices are on pace to see their highest close in quite some time. On the verge of a historic moment, there are still things to keep in mind especially this week. One of which is the Fed minutes from its January meeting.

Fed Officials Deem Rates Are Accurate For Current Conditions

gold stocks to watch Kinross Gold (KGC)

While traders see the likes of gold stocks such as Kinross (KGC Stock Report), GoldFields (GFI Stock Report), Newmont (NEM Stock Report) and juniors like IMC International (IMIMF Stock Report)(IMCX) and Liberty Gold (LGDTF Stock Report)(LGD) trade higher, the Fed may have helped give support for continued bullishness for the sector. On Wednesday, policymakers reported formal minutes of the January meeting indicating that there’s no hurry to move to a hawkish stance on rates.

The Fed agreed that current policy measures were in line to sustain economic growth & support inflation. This mark continues to fall short of the central bank’s initial target and showed a firm agreeance to keep rates on hold. Of course, this is in light of a major change in the economic outlook for the U.S. economy. Yet some have also seen the potential for further rate cuts.

“It is my view that, based on my base-case outlook for the U.S. economy, the current setting of the federal funds rate at 1.5 to 1.75 percent is roughly appropriate.”

Dallas Fed President Robert Kaplan

Keep in mind that the FOMC cut rates three times in 2019 but did not move in its previous two meetings. On top of this, traders have started pricing in a higher chance of another cut by September with a 50:50 shot of a move lower before 2021. At least a quarter-point is expected by the end of the 3rd quarter according to some. However, the Fed still has yet to concede to a true reason to think COVID-19 has dramatically impacted the U.S. economy.

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“We know that there will be some — very likely be some — effects on the United States (from the coronavirus fallout),” Chairman JayPowell said. “I think it’s just too early to say. We have to resist the temptation to speculate on this.”

Gold Stocks Trade Higher

Even as markets reach new record highs, gold stocks continue to press on. As discussed earlier, it could be more of a portfolio hedge than a flight to safety from coronavirus concerns. Supporting this case has been the Fed trading desk. Reports have cited that it has been conducting daily repo operations and short-term T-bill purchases to keep markets running smoothly.

Fed minutes show that the plan is to wind down these operations after April. The Committee also made a point to emphasize the repo ops were “technical” and nothing to do with changing the stance of monetary policy.

“Many participants stressed that, as reserves approached durably ample levels, the need for sizable Treasury bill purchases and repo operations would diminish and that such operations could be gradually scaled back or phased out.”

Taken From Fed Minutes, Feb 2020

Risks Ahead – Another Bullish Case For Top Gold Stocks

Meanwhile, there are other economic indicators that could be looming, further supporting gold’s bullish case. According to research from Refinitiv, corporate earnings climbed 22.7% in 2018. But earnings growth was much less in 2019 despite record market levels — an estimated 1.1%.

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The 2017 Tax Cuts and Jobs Act didn’t only help corporate earnings in 2018, it also lowered the corporate tax rate from 35% to 21%. What’s the significance? It sparked big corporate stock buybacks if you remember. According to Goldman Sachs, stock buybacks hit roughly $835 billion in 2018. These dropped 15% in 2019 to $710 billion. Furthermore, they are expected to fall another 5% in 2020. One of the driving forces of the market has been these big bouts of buybacks. Could this further signal potential for a downturn in the not so distant future?

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On top of this, we’re seeing corporate debt at record levels and climbing. The Washington Post said that U.S. corporate debt hit nearly $10 trillion at the end of 2019. This was around 47% of GDP for the year. That’s obviously been helped by the lower rate environment we see today.

What’s more, is that according to Goldman Sachs, last year saw the amount that corporations gave back to shareholders in the form of buybacks and dividends was greater than free cash flow for the first time since 2007. That would suggest companies are taking on more debt to facilitate share buybacks (that are consistently declining since 2017).

A Self-Fulfilling Prophecy?

Considering the circumstances, the general climate seems foggy. There are big positives on the surface yet there are numerous underlying negatives that don’t seem to be getting their share of the headlines right now. Meanwhile, we still have yet to see an end in sight to U.S.-China trade talks. That doesn’t seem as concerning considering President Donald Trump has said he would prefer something to shore up after the election.

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Still, global economies seem to be stalling. Germany’s Federal Statistics Office, for example, reported full-year growth of 0.6%. This marked the 10th year of economic expansion in the country. But this expansion was also much lower than the level of government-and-analyst forecasts from earlier in the year. It also represented the country’s weakest growth since 2013. Other countries are also expected to slow, Moody’s forecasts Britain’s GDP growth will slow to just 1% this year. This would be down from 1.2% growth last year.

The fact that the global economic performance is showing weakness may not bode well in the long-run as far as broader markets are concerned. However, for gold stocks and other precious metals, it could continue to support a bullish case. While the U.S. economy has performed well, it isn’t immune to global factors. So while many stocks have performed at a record pace, there are numerous things to keep in mind that could underpin a potential downturn.

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GoldStocks.com is owned and operated by Midam Ventures, LLC. Pursuant to an agreement between Midam Ventures LLC and IMC International Mining Corp. (CSE: IMCX) (IMIMF), Midam has been paid $200,000 for a period from January 7, 2020, to February 14, 2020. Midam has been paid an additional $200,000 and extended its period of coverage to March 14, 2020. Midam has been paid an additional $200,000 and extended its period of coverage to July 9, 2020. We may buy or sell additional shares of IMC International Mining Corp.(CSE: IMCX) (IMIMF) in the open market at any time, including before, during or after the Website and Information, to provide public dissemination of favorable Information about IMC International Mining Corp. (CSE: IMCX) (IMIMF). Click here for full disclaimer.


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