Could Interest Rate Rise Create Opportunity in Gold Stocks?

Bearish market sentiment for gold has created an opportunity to buy gold miners at attractive prices as equity markets assume a long-term gold price of less than $1,000

Morningstar Equity Analysts 1 December, 2015 | 11:35AM
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Fed rate hike worries have created an opportunity to buy gold miners at a discount. The market is rightly concerned about the impact of higher rates on investor demand for gold. But a narrow focus on investor demand overstates its importance to gold's long-term outlook. The next decade will see a profound shift in gold's nature: from a "financial" commodity to a "consumer" commodity.

The massive investment flows into and out of gold in the past several years temporarily concealed this development, but going forward, consumer spending will be too great to mask any longer. Even in the face of weak investor demand, we forecast a 4.7% CAGR in total physical gold demand over the next five years, led by Chinese and Indian jewellery buyers.

We expect jewellery to account for two thirds of gold demand by 2020, up from a 50% share in the past five years. We see the share of gold purchases by central banks and ETFs dwindling below 5%. Gold supply growth must accelerate, but mine projects in development would be insufficient to meet demand. To avert a shortfall, we estimate an additional 200 tonnes of annual mine supply would be required by 2020, equivalent to about 5% of global mine production.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Barrick Gold Corp26.03 CAD0.66Rating
Eldorado Gold Corp12.80 CAD0.79

About Author

Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.

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