Can Gold Repeat Its Rally in the New Year?

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1 Can Gold Repeat Its Rally in the New Year? By Annie Gilroy Dec 27, :33 PM Can Gold Repeat Its Rally in the New Year? Gold s performance in 2017 Year-to-date, gold prices have risen 9% as of December 18, Its performance is not what we expected. In 3Q17, gold breached the $1,300 per ounce level when geopolitical tensions between the United States and North Korea came to the forefront. Since then, gold prices have mostly gone downhill. Factors such as a strong US labor market, economic growth, recovery of the US dollar (UUP), and Congress passing the US tax reform bill were the main factors that led to the weakness in gold. Amid this weakness, some gold miners have managed to outperform gold prices as well as the broader gold miners index. Iamgold (IAG), Gold Fields (GFI), Royal Gold (RGLD), Kinross Gold (KGC), and Franco-Nevada (FNV) have been the best performers in 2017 with year-to-date gains of 44.2%, 37.5%, 33.6%, 30.9%, and 27.8%, respectively. Is gold s seasonal rally about to begin? Now that we re nearing the end of 2017, investors might be wondering what fate awaits gold in One of the factors that most traders or investors are waiting for is the seasonal gold price rally, which usually starts toward the end of December and continues until the first quarter of the next year. Before the seasonal rally, there is usually a seasonal weakness, which was already apparent in the gold price trend in early December Gold prices have rallied after weaker

2 December prices in four of the past five years. Historical trends: Is gold ready to fly? According to Bloomberg calculations, the NYSE Arca Gold Miners Index usually sees its best performance on average during January and February, while September and October have turned out to be its worst months. Even firms such as Goldman Sachs (GS), C IBC (C anadian Imperial Bank of C ommerce), and Toronto-Dominion Bank are expecting the repeat of gold s seasonal rally early next year. In this series, we ll look at some factors that could influence the demand for gold as we step into We ll start by looking at the impact of bitcoin on gold (GLD) in We ll look at gold miners take on the matter to understand if gold investors should be concerned about bitcoin sapping up the demand for gold. Will Bitcoin Steal Gold s Luster in 2018? Agnico Eagle Mines: Bitcoin could make a stronger case for gold According to Agnico Eagle Mines (AEM) C EO (chief executive officer) Sean Boyd, bitcoin (ARKW) may have taken some demand away from gold in 2017, but it will ultimately work to gold s advantage. He said, I actually think you can build a much stronger case for gold in an environment where bitcoin is drawing this kind of investor interest. Boyd believes that gold has done very well in an environment when the equity markets are making higher highs every week. He added that the market will turn at some point and that it will pay to be positioned properly in gold (NEM) (EGO). Barrick Gold: Bitcoin to reiterate gold s role Barrick Gold s (ABX) C EO Kelvin Dushnisky voiced a similar opinion. While talking to Bloomberg

3 regarding the future outlook for the market and the sector, he mentioned that it would be hard for cryptocurrencies to replace physical gold since gold is finite in supply. He added that a correction in bitcoin would offer a helpful reminder of gold s role as a store of value. Goldman Sachs: Different demand categories Goldman Sachs (GS) also believes that bitcoin isn t taking away the demand for gold. GS s global head of commodities research, Jeffrey C urrie, said that the investor segment for bitcoin and gold are vastly different. He believes that cryptocurrency is attracting more speculative flows than gold. He also doesn t see bitcoin providing the diversification and hedging benefits that gold provides. Could Physical Demand Come to Gold s Rescue in the New Year? Physical demand weaker in 2017 The overall physical gold demand in 2017 has remained lukewarm, with India bound by its new tax system and demonetization. In 3Q17, physical gold demand hit a nine-year low. However, C hina s gold demand remained more or less steady. After a lackluster 2016, C hina s gold demand increased in 2017 due to concerns surrounding the potential depreciation of the yuan, rising inflation, and restrictions on property market investments. Will Chinese New Year support higher gold prices? Market participants are expecting C hina to again support gold prices (GLD) in That s especially true in 1Q18 with the Chinese New Year (or CNY) in February Gold sales in China usually pick up in anticipation of CNY. In China, bars or jewelry made from gold are typically given as gifts during CNY.

4 In addition, factors such as yuan depreciation and property market restrictions should continue to steer C hinese investors toward gold. C hinese and Indian consumers are very price-sensitive. As long as gold prices remain low, C hinese consumers might keep on buying gold as other investment options remain less attractive. Is India supporting gold prices? India s economy has emerged from demonetization shock and has started adjusting to the goods and services tax. These two factors negatively impacted its gold demand in As conditions for Indian consumers normalize, they could start buying more gold again. That s especially true if gold prices remain low. This bounce back in gold prices could lead to gains in the stocks of companies such as Goldcorp (GG), Randgold Resources (GOLD), Hecla Mining (HL), and Franco-Nevada (FNV). These stocks are trading at $12.50, $90.40, $3.90, and $76.40, respectively. How the US Dollar Is Expected to Play on Gold Prices in 2018 US dollar and gold While gold might benefit briefly from the new year rally, a large portion of the remaining performance will depend on the outlook for the US dollar (UUP). Dollar-denominated assets such as gold and oil become cheaper when the value of the US dollar falls, and vice versa. Will US dollar strengthen in 2018? This year didn t turn out so well for the US dollar. Until September 2017, the dollar was low and then started showing signs of bottoming out. Factors such as the rise in other currencies, the disappointment over P resident Trump s agenda, and political uncertainty with North Korea and

5 Russia led to a steady fall in the dollar. The rise in the fourth quarter came on the back of the Fed s interest rate outlook, C ongress passing the US tax reform bill, and other US economic factors. Most market participants believe these factors could keep supporting the US dollar into Better-than-expected inflation figures could lead the Fed to raise the interest rate three times in That would be beneficial for the US dollar and detrimental to gold. The negative sentiment for gold could also affect miners such as Royal Gold (RGLD), Barrick Gold (ABX), Kinross Gold (KGC), and Coeur Mining (CDE), which are leveraged plays on gold (JNUG). Although royalty companies such as RGLD have done well in 2017 year-to-date, other miners have lagged. ABX and C DE returned -11.1% and -14.2%, respectively. KGC has been an outlier with returns of 30.9% year-to-date. Counterargument Some analysts, however, are predicting that the US dollar will extend its 2017 decline into BMO Capital Markets believes that as growth in the rest of the world catches up with the United States, the tax benefit may not materialize. As the performance differential between the United States and the rest of the world shrinks, the US dollar might come under pressure. ING Group has a similar argument regarding the rest of the world strengthening and extending the decline of the US dollar. If these arguments prove to be true, contrary to the above arguments, gold could be in for a great year in Do Analysts Believe in a 2018 Rally for Gold? Analysts outlook for gold Wall Street analysts outlook for gold helps us understand the path that gold investments could take going forward. Gold investments include physical gold and ETFs such as the VanEck Vectors Gold Miners ETF (GDX). As we near the end of 2017, analysts have taken out their so-called crystal balls to predict gold s future in In this part of the series, we ll see what analysts are pricing in for gold in Bloomberg has compiled analysts views for gold as we enter 2018.

6 Goldman Sachs and BoFA Merrill Lynch Goldman Sachs (GS) sees a new year gold rally supported by the Chinese New Year in February It believes that precious metal prices should see a -6% return in It expects gold prices to reach $1,200 per ounce by mid It expects silver to follow gold s prices, or lower over the next six months. After that, it expects silver to outperform gold on higher industrial use. A negative return for gold prices could impact gold miners in a big way since miners are a leveraged play on gold. They tend to magnify gold s gains or losses. However, that hasn t been the case in While gold prices have risen 9% year-to-date, many gold miners have reported negative returns. These miners include Eldorado Gold (EGO), Tahoe Resources (TAHO), Barrick Gold (ABX), and Goldcorp (GG). Bank of America (or BofA) Merrill Lynch sees limited room for gold prices to rise in It believes the macro-economic outlook for bullion remains challenging. There is one upside, however, arising from the surprise inflation data, which could steer investors toward gold. Gold is regarded as a hedge against inflation. Morgan Stanley and CIBC Morgan Stanley (MS) expects gold prices to average $1,269 per ounce in It believes the Fed s rate hike cycle throughout 2018 could weigh down gold prices. The C IBC (C anadian Imperial Bank of C ommerce) recommends that investors play the seasonal trade by buying precious metal stocks in December and selling them off in February. Which Picks Analysts Are Banking On for New Year Gold Rally

7 Analysts picks In addition to providing their views regarding the price of gold (GLD) (IAU), analysts also provide their top picks to play the seasonal rally they expect for gold. Some analysts also like stocks based on their fundamentals, which could be for long-term investment purposes. In this series, we ll take a look at those analyst picks. CIBC and Toronto Dominion Bank The C IBC (C anadian Imperial Bank of C ommerce) recommends that investors who have goldweighted portfolios should include Agnico Eagle Mines (AEM), Franco-Nevada (FNV), Kinross Gold (KGC), and Newmont Mining (NEM). It suggests more leveraged stocks such as Barrick Gold (ABX), Gold Fields (GFI), and Iamgold (IAG) to add more torque to portfolios. While ABX and GG have reported negative returns in 2017 due to company-specific factors, GFI and IAG are among the top five gold stocks in 2017 based on their returns. All these stocks have higher-than-average leverages to gold prices, either due to operating or financial leverage or company-specific issues. Toronto-Dominion Bank expects a rally in the new year and lists Goldcorp (GG), Kinross Gold (KGC), B2Gold (BTG), Alamos Gold (AGI), and Semafo as its top picks for Scotiabank and Bank of Montreal Scotiabank believes that gold miners valuations on average are cheaper than gold prices. Royalty and streaming companies (GOAU) are exceptions to this. Scotiabank has Agnico Eagle Mines (AEM) and Goldcorp (GG) as its top picks for These stocks have returned 3.1% and -8.2%, respectively, year-to-date as of December 18, The Bank of Montreal suggests that investors take a selective approach to a shotgun approach. It suggests B2Gold, C entamin, and Detour Gold.

8 Have Gold Prices Found the Bottom? COT report and gold The C FTC (C ommodity Futures Trading C ommission) releases its C OT (C ommitment of Traders) report every Friday. It provides a breakdown of open interest in the futures market for each week ending on Tuesday. Positioning of speculators and commercials Large speculators have made a record shift in their positioning for the last two weeks. In the latest week, they reduced their net longs by 66,000 contracts after a reduction of ~51,000 contracts the previous week. This group of traders is usually considered trend-followers. The extreme positing by this group may provide a clue to a changing trend. In contrast to speculators, commercial traders and bullion banks have reduced their net short positions in gold. This group of traders is usually referred to as smart money. When this category hits the bottom in short interest, prices usually rise. It has been hailed as an indicator that gold prices could have an advantage as we enter Is the bottom in gold near? Another indicator that s usually seen as a turning point for gold prices is the net long position of speculators. Usually, when the net long position of large speculators falls to around 100,000 contracts, the metal usually bottoms out. C urrently, the figure is close to 100,000 contracts, which might mean that either we ve already seen a bottom or are close to a bottom in gold prices. A bottom in gold prices would mean a rally, which would be positive for equities such as Gold Fields (GFI), B2Gold (BTG), Harmony Gold (HMY), and Alamos Gold (AGI). GFI and BTG make up 1.8%

9 and 1.4%, respectively, of the VanEck Vectors Gold Miners ETF (GDX). HMY and AGI currently aren t part of GDX s holdings. The Outlook for Gold as We Enter 2018 Factors supporting gold s new year rally Previously in this series, we looked at gold prices and how they could be getting ready for a new year rally as we enter Indicators such as seasonal patterns for the past few years, the recent C OT (C ommitment of Traders) report, and the physical demand outlook could mean that investors could benefit from a short-term bounce in gold prices, which might continue well into the first quarter of There are, however, fundamental factors that could decide the fate of gold prices in the long term. Factors pointing to a downside US equities (SP Y) (SP X-INDEX) had a stellar run in 2017, hitting higher highs. Volatility, on the other hand, remained low. Tax reform could further boost equities in 2018, which would be a headwind for gold prices. When economic conditions are good and the stock markets are doing well, investors don t worry too much about hedging their exposure and safe-haven investments. The Fed has suggested three more interest rate hikes in While there are fewer chances of it surprising to the upside, any similar situation could cause gold to come under pressure. Moreover, the more-than-expected hawkish tone of the Fed could mar gold s investment appeal. Lack of fundamental positive catalysts

10 As we saw in What Can Investors Expect from Gold Prices in 2018? factors such as the euphoric equity market outlook after the passage of the tax reform bill, a recovering US dollar, interest rate hikes by the Fed, and rosy US economic conditions point to a downside for gold prices in There are not many catalysts that can fundamentally support the price of gold, and it could come under selling pressure even if a small negative catalyst materializes in the medium term. Under this scenario, gold (GLD) and gold stocks (GDX) (NUGT) such as Barrick Gold (ABX), Iamgold (IAG), Kinross Gold (KGC), and Newmont Mining (NEM) could fall further. ABX, IAG, KGC, and NEM have returned -11.1%, 44.2%, 30.9%, and 5.8%, respectively, year-to-date.