Gold on the Turnaround
Investors shouldn’t worry about the brief stumble in gold prices. The precious metal has had an extraordinary year thus far, with gains stretching well into the double-digits, and things are only going to get better.
Or at least that’s according to gold strategist Larry McDonald. (Source: “Why the gold miners could be a ‘screaming buy’,” CNBC, October 17, 2016.)
McDonald says the fall in gold prices is explained by the odds of higher interest rates. Since the Federal Reserve has started priming markets for a second rate hike, investors began shifting their portfolios accordingly, which led to a noticeable drop in precious metals.
The Market Vectors Gold Miners ETF (NYSEARCA:GDX), a popular fund for measuring the strength across mining, dropped 19% over the last three months. That being said, it rose 82% in the nine months preceding those losses, so the year-to-date chart is still drenched in green.
Better still, McDonald believes the expectations of a Fed rate hike will prove baseless, clearing the way for a spectacular bullish run in precious metals. He thinks Janet Yellen and the other Fed governors will kick the can down the road, as they have done many times before.
“The market’s going to push the Fed until the Fed breaks and doesn’t hike,” McDonald said Friday on CNBC. When that happens, “gold miners will be the best place to be,” he added. “The risk reward even [in] the shorter term is quite good as the market is almost fully in the December hike camp. If those chances are to change to the downside, miners will be a great beneficiary.”
The implication is that trading gold is akin to trading the direction of Fed policy. McDonald even went so far as to say that “gold miners are a screaming buy” because the Fed is likely to cave.
Moreover, there are other analysts who corroborate McDonald’s view. Other analysts have written to CNBC saying they are seeing identical movements in markets. For instance, S&P Global Equity Chief Investment Officer Erin Gibbs wrote that stocks in GDX have a median upside of 37%.
“It seems that Wall Street analysts agree with Larry [McDonald],” Gibbs wrote. “Considering these earnings expectations, I think it’s definitely a safe bet for the fourth quarter.”