Where to Next for Gold Stocks?

With yet another day of heavy selling on the ASX, it looks too early to go bargain hunting for stocks, in our view.

After more than a 10% drop in only one week we could be wrong. We may well be in for a bounce as investors take solace in likely interest rate cuts to come from the world’s top central banks. Not to mention billions of dollars in fiscal spending from government.

But uncertainties abound.

Just ask what the mortality rate for COVID-19 is. Even the ‘experts’ will give you a range of answers, from as little as 1% to more than 5%.

That’s some range.

As you’d expect, the fear and uncertainty helped spark a rally in the gold markets and many gold stocks.

But that rally stalled last week…and sharply reversed on Friday.

You can see the one month gold chart below (in US dollars):

gold stocks

Source: Bloomberg

From its US$1,669 peak last Monday, gold’s dropped 4.9%, trading at US$1,588 ounce at time of writing.

But if gold is supposed to be the haven asset, why the big fall?

According to global strategist, Jim Rickards:

With the stock market plummeting hedge funds and other institutional investors had to suddenly raise cash to meet margin calls on their positions in the equity markets. And they had to get the cash from somewhere. Gold is a very liquid asset that can quickly be traded for cash.’

Does this mean gold’s resurgent bull run is coming to an end?

Not at all.

Though gold may slip further as investors scramble for cash, its haven asset should see its bull run higher resume. And with central banks likely to drop interest rates this month (the RBA looks ready to do so tomorrow), gold may shine even brighter.

In fact, last week Goldman Sachs substantially lifted its outlook for the yellow metal. As Bloomberg  notes, ‘The bank expects prices to climb to $1,700 an ounce in three months, and to $1,750 in six months. It previously forecast $1,600 for both time frames.

Most gold stocks are down over the past few trading days, mirroring gold’s decline. But if gold ramps up to US$1,750 the well–placed miners and producers could see gains many times any rise in the price of gold.

Just keep in mind that even if gold tops US$1,800 by year’s end, not all gold stocks will see share price gains. Some will even lose money.

To help you sort the wheat from the chaff, The Rum Rebellion editor, Greg Canavan put together a free special report. It’s called ‘How to Pick Winning Gold Stocks’. You can download that, for free, by clicking here.

Bernd Struben is an Editor of The Rum Rebellion. In this capacity, he has access to one of the most intriguing and powerful networks of practical investment insight anywhere in the world.

Bernd has worked on four different continents, and has more than 20 years of professional finance, editorial, and management experience. He holds a degree in economics.

The Rum Rebellion