Analysts at Goldman Sachs are encouraging investors to get into gold, predicting price rises despite concerns over interest hikes, which is good news for the VanEck Vectors Gold Miners ETF [GDX] share price.
The investment bank upped its six-month gold price forecast to $2,050 per troy ounce, compared with the present level of around $1,800.
Goldman said that gold was the defensive asset to turn to in an age of high inflation, which erodes the value of cash and even interest rates.
“Gold has remained very resilient during the recent increase in US real rates,” the investment banking giant said, as reported by The Mail on Sunday. “In our view, this is due to gold’s status as both an inflation-hedging and a defensive asset.”
Other drivers for the gold price this year, according to the World Gold Council, will be strong demand for jewellery, small bars and coins. It also expects central banks to continue buying gold, albeit at a slower pace.
Fluctuating gold prices weighed on the GDX share price
This all bodes well for the struggling VanEck Vectors Gold Miners ETF, which invests in equity securities issued by global producers of gold and silver. Its underlying index is the NYSE Arca Gold Miners Index.
“Glittering through good and bad times, gold has proved the ultimate hedge against uncertainty. The VanEck Vectors Gold Miners UCITS ETF invests in gold and silver miners’ stocks, which have prices strongly correlated with the gold price,” the provider states.
However, the GDX share price has dropped 11.6% over the past 12 months and its year-to-date daily total return has fallen by 8.5%.
This is primarily down to volatility in the gold price, which fell from $1,900 in May to $1,719 in August as pandemic restrictions lifted and then rose back up to $1,865 in November with the emergence of the omicron variant.
Investors have preferred soaraway equities to gold. Saxo Bank analyst Ole Hansen told InvestorPlace that “fund managers have been slashing their exposures to the yellow metal over the last year amid low volatility in the stock market and soaring equity prices reducing the need for diversification”.
But that could be changing, with higher inflation creating volatility and hitting the valuations of high-growth firms, particularly in the tech sector.
The GDX has net assets of $665.2m and 57 holdings, of which Newmont Mining Corporation [NEM] has the biggest weighting at 17.48%. It is followed by Barrick Gold Corporation [GOLD] (12.1%), Franco-Nevada Corporation [FNV] (8.99%) and Wheaton Precious Metals [WPM] (6.44%).
How have Newmont and Barrick stocks performed?
Shares in Newmont dropped from $74 in mid-May last year to $53 in early December but have partly recovered to sit at $59.86 at the close on 28 January. Its third-quarter update was disappointing, with gold production down 6% due to a mechanical failure at one of its mines and revenues down 9% year-over-year to $2.9bn. However, Newmont recently revealed that it expected 6.2 million ounces of gold production this year, up from an expected 6 million in 2021, at an $1,800 gold price assumption.
Barrick Gold’s share price has dropped 21.1% since the end of May 2021 but rose 5.2% since mid-December to date. It was boosted by a December update, which showed that despite the ongoing challenges posed by the pandemic, the company had met its annual guidance targets for the third consecutive year. Preliminary gold production for the full year of 4.44 million ounces was within the guidance range of 4.4 million to 4.7 million.
Analysts are generally bullish about gold prices
Analysts at MKS Pamp said uncertainty over the number of rate hikes – potentially as many as four – expected from the Federal Reserve this year could be a headwind for gold pricing, but only for a short period of time.
“The way the gold trade is unfolding is looking mostly bullish. If the Fed makes a policy mistake and has to quickly hike rates and send the economy into a recession, that should be an environment where gold outperforms equities” - OANDA analyst Edward Moya
It said: “Gold historically and surprisingly to most tends to rise marginally during Fed hiking cycles.”
With Covid disruption hopefully in the rear-view mirror and a climbing gold price, expect the GDX to shine brighter in 2022.
“Inflation hitting a 30-year high was music to gold traders’ ears,” OANDA analyst Edward Moya told Investor Place. “The way the gold trade is unfolding is looking mostly bullish. If the Fed makes a policy mistake and has to quickly hike rates and send the economy into a recession, that should be an environment where gold outperforms equities.”