Goldcorp Inc (GG) is up 70% so far this year, leveraging off the higher price of the underlying commodity. Nevertheless, it’s not very common for large mining companies to move so much in a relatively short amount of time. UBS strategists wrote to its clients in a report that the story for gold now may be the most compelling in recent memory. A key driver is the amount of low interest rates in the world. Some governments even have negative interest rates on their bonds. UBS strategist Joni Teves wrote in a report that an “environment of low and negative rates narrows the gap between holding gold vs other assets, making having gold in a portfolio an attractive proposition amid heightened global macro uncertainty.” UBS investment banking analysts further say that the yellow metal has likely entered the early stages of the next bull run. The price of gold bullion is hovering around $1350 an ounce today. It has gone up about 27% since the start of the year. This is why gold mining companies around the world are doing so well, especially those with diverse international mines to spread out geographical risk like Goldcorp has done. Credit Suisse also weighed in on GG, raising the stock’s price target to $22.50 over the next year, which is prediction a 14% increase. Options traders of Goldcorp have recently been buying to open puts over calls at a faster-than-usual pace. UBS is projecting gold to hit $1400 per ounce in the next 6 months. Much of the expected surge will be from the uncertainty created by Britain’s decision to leave the European Union. Another unpredictable factor is the upcoming US presidential election. These uncertainties would be the main reasons for Goldcorp to outperform the market. UBS also raised its 2017, 2018 and 2019 gold price forecasts to $1,400, $1,450 and $1,475, respectively. This is great news for Goldcorp.
But not everyone is bullish on gold companies. According to John Laforge, a real asset strategist from Wells Fargo says that today’s gold price “does not appear to be a good entry point for long term gold investors. As for the best potential entry point, history suggests that gold could eventually retest its lows this cycle, around $1050 per ounce.” Be believes that gold is headed for a downturn in the near future based on the theory of commodity bear supercycles. Laforge says that the bearish cycle which began in 2011 is expected to last for 20 years. Until then he says we can expect the price of gold to go down and we can expect a drop of roughly $300 per ounce.
Is gold going bull or bear? Unfortunately it’s hard to tell because short term news and information distort the real picture of the gold market due to how irregular economic data can be. For example the reason June was such a good month for precious metals was because of the Brexit event, as well as disappointing labor statistics out of the U.S. Only 11 thousand jobs were created in May so it lead people to worry that the economy is not doing very well. However, the latest labor numbers for June actually turned out to be better than expected. 287 thousand new jobs were created last month so perhaps the U.S. is actually in pretty good shape and people shouldn’t worry be so concerned. If that’s the case then the price of gold could stabilize or even drop like Laforge mentions. A common way for investors to use gold is treat it as an insurance policy. Gold is a good store of value in case we start to outlive the fiat currency of today’s world.
This author is long 100 shares GG as of writing this post.