Gold is one of the go-to havens for investors in times when the market goes bearish and all else seems to be failing. What does this mean for gold miners?
When things are on the sunny side gold prices usually correct themselves downward, while economically challenging times that reflect on the stock market performance usually drive the price of gold upward, due to the flight of investors to commodities.
According to Warren Buffet, an American investor and philanthropist who’s regarded as the world’s most successful investor: “Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time.”
Adding that: “Gold is a huge favorite of investors who fear almost all other assets, especially paper money.”
With the current outlook on the markets and the projections for global growth by the International Monetary Fund (IMF), it seems plausible for some experts that now “might finally be time to start looking at gold mining stocks,” writes U.S. News & World Report.
Gold miners have never been this cheap. Is 2016 their year? https://t.co/g65bl44MJv
— MoneyWeek (@MoneyWeek) January 23, 2016
Fear can be good for business
With the fear created on the global markets by China’s stock market debacles, and its ebbing economic growth, gold prices seem to be outperforming commodity and financial markets in 2016. As the shock waves sent around the global world of stock trading hit the U.S. markets, gold was just a bit short of hitting a two-month high, according to U.S. News & World Report.
“The metal is also holding above its 2015 lows around $1,045, which is why some market watchers think gold might be trying to finally stabilize. That could be good news for beleaguered gold mining stocks, too,” Frank Holmes, chief executive officer and chief investment officer of U.S. Global Investors told U.S. News & World Report.
While some investment analysts are going positive on the outlooks of gold miners, other experts “remain negative on the price outlook.” Thick sands for the precious-metal still remain a probability, as a slump of “U.S. dollar strength and the possibility of the Federal Reserve further hiking interest rates this year,” remain imminent.
While the global economic activity experienced somewhat of a slowdown in 2015, the “growth in emerging market and developing economies” were responsible for 70 percent of global growth, in general, the World Economic Outlook (WEO) said.
The bigger picture
The unfortunate development on China’s stock markets and the slow decay of its economy has not been positive for the further development of emerging markets and developing economies, as these are to some degree linked to China’s economic prosper or slow demise.
China hopes to be included in a lucky circle of hands that are allowed to draw from the international reserves, made available in the frame of the IMF’s “special drawing rights currency basket.” In order to be included China aims to let the yuan “depreciate and appreciate more flexibly” in connection with market situations, according to CNBC.
“What the depreciation says about China’s growth concerns should be a worry for emerging markets that export heavily to China, particularly commodity producers such as Brazil, Russia, South Africa, Indonesia, and Malaysia”, CNBC added.
— Fernando Pertini (@DecodeMarkets) January 20, 2016
While many analysts base their optimism about gold miners ETFs on the current value development of gold, which is benefitting from the flight of investors, flocking in from a currently very volatile market, the general slowdown of the global market growth might pose a headwind for gold miners in the near future.
Gold miners have been trying to steer against devaluation by lowering production costs in recent years, as shown on Mineweb. Many factors outside of the miners’ control, like important gold producer currencies depreciating a lot against the U.S dollar — which is the currency gold is sold in — made it increasingly cheaper to mine gold. The low price of oil has also helped the mining costs drop.
Ultimately, regardless of what analysts claim, their predictions seem no different than those of the weather. How precise are the methods used to predict the rise and fall of stocks, ETFs and other investments? Can we predict the unpredictable?