While the gold price has risen by 10% this year, it faces an uncertain future. In the US, UK and Europe monetary policy looks set to tighten, with a rise in interest rates on the cards over the medium term. Alongside this, a new Federal Reserve Chair could adopt a more hawkish stance next year. This would be likely to hurt prospects for the gold price.
However, with geo-political risks from North Korea remaining high, gold could offer defensive appeal. The valuations, forecasts and financial strength of two gold miners in particular may also suggest they are worth buying for the long run.
Gold price risks
Since the price of gold is closely linked to the level of interest rates, the prospect of a tighter monetary policy could hurt the price of the precious metal. In the UK, an interest rate rise now seems highly likely before the end of the year after GDP growth in Q3 was higher than expected. In the Eurozone, improving economic performance may lead to a tapering of QE and possible interest rate rise next year.
Similarly, in the US there is expected to be a rise in interest rates before the end of the year. This is forecast to be followed by up to three further increases in 2018. However, a more hawkish monetary policy could be followed depending on who succeeds Janet Yellen as Fed Chair from February 2018. With President Trump rumoured to be considering John Taylor for the position, the price of gold could be negatively affected as his ‘Taylor Rule’ suggests rates should be higher than their current level.
Of course, the uncertain outlook for gold is offset to some degree by the prospects regarding North Korea. Although the situation has not been in the headlines of late and may therefore seem to be less of a risk than it was, little has changed in recent weeks. It continues to present a significant risk to global security and to the world economy. Should the situation deteriorate, the price of gold is likely to respond positively as investors may adopt increasingly risk averse attitudes.
In such a scenario, gold miners such as KAZ Minerals (LON:KAZ) and Randgold Resources* (LON:RRS) could see their share prices rise. KAZ Minerals reported this week that its strategy is moving ahead as planned, with production increases taking place. They are forecast to help increase the company’s EPS by 143% in 2017 and by 25% in 2018. This puts the stock on a PEG ratio of 0.4, while at the same time its balance sheet is improving through net debt reduction.
Similarly, Randgold Resources has EPS growth forecasts of 27% for the current year and 18% next year as higher production boosts its profitability. It is in a strong financial position to fund future exploration and development, which could mean that it generates significant levels of free cash flow over the long run. This could be returned to shareholders via higher dividends.
Clearly, there is an uncertain period ahead for the gold price. Interest rate rises in the US in particular may hurt its progress after a buoyant 2017. However, with risks from North Korea remaining high and Randgold Resources and KAZ Minerals offering investment potential, they could be worth buying for the long run.
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* Robert Stephens owns shares in Randgold Resources.