Gold has recently been trading around US$1,265 an ounce. The price is expected to average US$1,250 an ounce in 2017 and 2018. Some factors are working to restrain gold prices while other factors are supportive of gold prices.
One factor working against gold is rising interest rates, especially in the U.S. This raises what's known as the 'opportunity cost' of gold. That is, holding gold costs you more in terms of foregone interest.
A second factor is low inflation and deflation in some countries, such as Japan. This reduces the appeal of gold as a hedge against inflation.
A third factor is fair government finances in Canada and the U.S. This lessens the risk of a debasement of both dollars and the need for gold. The same is true of Germany, among others.
A fourth factor is that gold produces no income. Worse, one must pay for its safe keeping.
A fifth factor is that the U.S. dollar is high. Gold usually moves in the opposite direction of the dollar.
A sixth factor is less gold jewelry made in China and India in the last quarter of 2016. And low oil prices have curbed buying in the Middle East.
The price of gold is notoriously cyclical and unpredictable. The industry itself didn't foresee the most recent setback in the price of gold.
One long-term factor raising the price of gold is the growth of the middle classes in China and India, which prize the yellow metal. A good harvest in India bodes well for the price of gold in the short term.
Second, some investors distrust paper currencies and prefer to hold gold. Weak finances in Southern Europe raise the risk of a debasement of the euro.
Third is higher demand by many central banks. They want reserves of gold instead of currencies.
Fourth, moderate gold prices makes it less profitable to produce. It can lead to a shutdown of marginal mines and depress gold scrap recoveries. Lower supply is supportive of gold prices in the long term.
Fifth, there are fewer short sales. Short sellers borrow gold, sell it and hope to replace it at lower prices. They pocket or lose the difference between the price at which they sell and buy back. With the price of gold stable, short sales have lost appeal. Short sellers need to buy gold to close their positions.
The Investment Reporter recently surveyed 15 gold stocks-six senior producers, seven intermediate producers, a junior producer and a small producer. Of those, it found six gold stocks to buy now. They are:
?- Senior producers Barrick Gold Corporation (TSX-ABX) and Newmont Mining Corporation (NYSE-NEM);
?- Intermediate producers Alamos Gold Inc. (TSX-AGI), Golden Star Resources (TSX-GSC) and New Gold (TSX-NDG); and
?- Junior Producer Richmont Mines (TSX-SNC).
Alternatives to stocks include gold exchange-traded funds or gold bullion. Just remember that given gold's disadvantages, it's best to hold relatively little.
This is an edited version of an article that was originally published for subscribers in the April 21, 2017, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
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