With gold stocks these days so deeply out of favour, contrarian investors are getting interested. But I’ll be waiting and watching a bit longer.
There are good reasons to be bullish over the long term on gold stocks. However, as Goldman Sachs and Société Générale analysts say, a recovery in the U.S. economy is gaining momentum and chipping away at the insurance value of gold. Economic turbulence is easier to absorb when the world’s largest economy is powering ahead.
Moreover, gold is inversely correlated to the U.S. dollar and the latter typically strengthens along with the U.S. economy. And as U.S. economic growth becomes self-sustaining, interest rates can be allowed to rise, which would offer more competition to non-income paying assets such as gold.
But I’ll still keep my eye on the gold miners and exchange-traded funds (ETFs) such as the BMO Junior Gold Index ETF. At some point, bullion prices should find a bottom and experience new uptrends, which should help ease the squeeze on company margins.
In addition, there has been a recent pick-up in insider buying, often a precursor to a rebound in stock prices six to 24 months down the road. Plus, investor pressure to contain cost overruns and deliver more value has led to widespread management changes that could bring about corporate turnarounds, as mentioned in “Gold stocks’ turn to shine.”