Opportunities in Gold Miners After Rate Hike

At its December meeting, the Federal Reserve raised the federal funds target rate 25 basis points, to 0.50%-0.75%. In addition, the central bank cited improving economic conditions that could support an additional 75 basis points of rate increases in 2017. While the December rate hike was largely expected by the market, the additional three increases next year appear to have come as somewhat of a surprise, as gold prices fell roughly $20 per ounce to roughly $1,140. We expect gold to fall to $1,100 per ounce by the end of 2017 as the rising nominal interest rate environment coupled with continued inflation weakness creates an unfriendly environment for gold as an investment.

Longer term, most Federal Open Market Committee members continue to anticipate the fed funds rate to rise to around 3%. Furthermore, despite continued weakness in inflation in the near term, the FOMC continues to expect long-run inflation of about 2%. As a result, we see the case for gold as an investment will remain weak in the longer term. We expect that in the long term, Chinese and Indian jewelry demand will fill the gap left by investment demand. However, the rise of consumer demand will take time, which means significant risk to gold prices in the near term. Our long-term gold price forecast is unchanged at $1,300 per ounce by 2020.

Most gold miners look fairly valued at this time. However, we see opportunities in Eldorado, Goldcorp, and Kinross, driven by company-specific issues. For Eldorado, risks to the opening of its Greek operations are an overhang. Goldcorp investors continue to wait to see improvement in the firm’s youngest mines, Cerro Negro and Eleonore. Kinross' shares have traded off by a larger degree than we expected, given the declining gold price. Nevertheless, we caution investors that the near term will remain rocky. Significant investment flowed into gold over 2016, and the return of these ounces to the supply will create additional downward pressure on prices.

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