Gold Glitters on US-China Trade War Jitters: 6 Top Picks

Gold price continues its dream run as more than a year-long trade dispute and tariff war between the United States and China is deteriorating by the day. Despite the fact that talks and discussions to reach a solution haven’t stopped, the ground reality is that the two largest trading nations are falling deep in crisis.

No Ray of Hope on Trade War Front

On Aug 23, China announced that it will impose 5% to 10% tariff on another $75 billion of U.S. goods in two tranches, on Sep 1 and Dec 15. Additionally, a 25% tariff on U.S. auto products and auto parts will be imposed effective Dec 15.

In retaliation, President Donald Trump decided to raise tariff to 30% from the existing 25% on $250 billion Chinese goods. Moreover, he also raised the tariff from 10% to 15%, which is to be levied on an additional $300 billion of Chinese exports effective Sep 1. Consequently, tariff on $550 billion Chinese goods will cover total U.S. imports from China per annum.

Furthermore, Trump tweeted by issuing an order to U.S. companies to look for an alternative to China for their operations including returning home. President Trump also hinted that prolonging U.S.-China trade conflict can lead to the imposition of national emergency, though not immediately.

Following these negative developments, Wall Street plunged on Aug 23. Three major stock indexes -- the Dow, the S&P 500 and the Nasdaq Composite -- plummeted 2.4%, 2.6% and 3%, respectively. So far in August, these indexes have lost 4.6%, 4.5% and 5.2%, respectively, owing to global economic slowdown and fear of a U.S. recession due to a lingering trade spat.

Gold Continues Dream Run

On Aug 23, gold futures for December Delivery surged 1.9% to $1,537.60 per ounce. This marked the highest gold price since April 2013. Spot gold price also soared 1.9% to 1,525.51 an ounce. Year to date, return to gold has jumped 18.9%, surpassing the market’s benchmark S&P 500 Index’s gain of a 13.6%.

Gold price climbed to more than 1,500 per ounce for the first time in August since April 2013 on concerns of U.S. and global recession as well as anticipation of market participants for further rate cuts. The lower the interest rates, the lesser will be the opportunity cost of holding non-yielding bullion, making gold attractive for investors holding other currencies.

Three Future Drivers of Gold Price

Buying pressure on gold is likely to remain firm as investors will focus on precious metals as a store of wealth and hedge against market turmoil.

First, on Aug 23, Fed Chair Jerome Powell delivered a speech from an annual central banking symposium in Jackson Hole, WY, where he once gain reiterated that the central bank will do whatever necessary to expand an 11-year long U.S. business expansion. It clearly gives hints of a likely second rate cut at the Fed’s next FOMC meeting scheduled in Sep 17-18. As per CME FedWatch, respondents currently assigned a 100% probability for a second rate cut in September after a quarter basis point cut in July.

Second, yields on 2-year and 10-year U.S. Treasury Notes inverted on Aug 23 at 1.528% and 1.523%, respectively. Inversion of the main treasury yield curve happened for the first time on Aug 14, since Dec 2005. After that the 2-10 Treasury bond yield inversion happened three more times within the next 10 days. Several economists consider this bond market situation as a clear signal of an impending recession.

Third, on Aug 23, the ICE U.S Dollar Index, which measures the price of U.S. currency against six major global currencies, fell 0.5% to 97.72. U.S. dollar slid on fears of global economic slowdown stemming from trade dispute. Expectation of low interest rate made U.S. dollar less attractive to investors, thereby making gold more demanding.

Our Top Picks

At this stage, it will be prudent to invest in gold stocks with strong growth potential. We have narrowed down our search to six such stocks, which soared in the past month while the broad-market contracted. Each of these stocks carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

AngloGold Ashanti Ltd. AU is an independent, global gold mining company with mines and exploration projects across Africa, Americas and Australasia. It is the third-biggest gold mining company globally in terms of production. The company has expected earnings growth of 158.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 22.3% over the last 30 days. The stock has skyrocketed 22.4% in the past month.

Kinross Gold Corp. KGC engages in the acquisition, exploration and development of gold properties in the United States, the Russian Federation, Brazil, Chile, Ghana and Mauritania. The company has expected earnings growth of 150% for the current year. The Zacks Consensus Estimate for the current year has improved by 25% over the last 30 days. The stock has skyrocketed 18.7% in the past month.

Alamos Gold Inc. AGI engages in the acquisition, exploration, development and extraction of gold deposits in North America. It also explores for silver and precious metals. The company has expected earnings growth of 320% for the current year. The Zacks Consensus Estimate for the current year has improved by 16.7% over the last 30 days. The stock has jumped 10.3% in the past month.

Royal Gold Inc. RGLD acquires and manages precious metal streams, royalties and related interests, with the primary focus on gold. The company has expected earnings growth of 74.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 12.4% over the last 30 days. The stock has jumped 9.8% in the past month.

Franco-Nevada Corp. FNV is a gold-focused royalty and stream company with additional interests in platinum group metals and other resource assets. The company has expected earnings growth of 34.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 10.6% over the last 30 days. The stock has surged 8.1% in the past month.

Kirkland Lake Gold Ltd. KL engages in the provision of mining and mineral exploration. It focuses on gold assets primarily in Canada and Australia. The company has expected earnings growth of 63.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 7.2% over the last 60 days. The stock has surged 6.2% in the past month.

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Click to get this free report Franco-Nevada Corporation (FNV) : Free Stock Analysis Report Royal Gold, Inc. (RGLD) : Free Stock Analysis Report AngloGold Ashanti Limited (AU) : Free Stock Analysis Report Kinross Gold Corporation (KGC) : Free Stock Analysis Report Alamos Gold Inc. (AGI) : Free Stock Analysis Report Kirkland Lake Gold Ltd. (KL) : Free Stock Analysis Report To read this article on Zacks.com click here.