Gold Prices Will Continue to Drive Newmont, Barrick Gold Higher

The Chicago Mercantile Exchange (NYSE:CME) raised the margin requirements on gold trading at its Comex by 27 percent after the price of an ounce of gold surged to more than $1,900 recently. The cash deposit for borrowing from brokers to trade gold futures now stands at $9,450 per 100-ounce contract, which is 27 percent higher than the previous amount. The increase triggered the decline in the gold price and led to dips in the share of gold miners Barrick Gold (NYSE:ABX) and Newmont (NYSE:NEM). Below we take a look at some recent events in the gold market and review some of the near term catalysts supporting our optimistic view on the miners.

We have a $53 price estimate for Barrick Gold, a $75.80 price estimate for Newmont and a $311 price estimate for CME Group.

Safe haven status has driven recent rallies

The spot market selling price for gold is a direct measure for the mining company’s profit margins. Gold is produced at an average cost of $400 to $600 per ounce depending upon the quality of the ore and other regional factors. The shares of Barrick Gold and Newmont Mining have soared in the past few weeks as the yellow metal rallied during the same period.

Rising debt concerns and uncertainty in the equity markets has made investors switch to safer investment tools like gold, silver and other precious metals. The massive demand for gold pushed prices above $1,900 recently as the open interest for gold options climbed to a record 1.26 million contracts on August 18.

With the 27 percent increase in the margin cost, Comex has made it expensive for the speculators to trade the metal, consequently resulting a slump in the demand and a more than 7 percent decline in the gold price during the subseqent week.

Strong fundamentals will continue to drive gold

Increases in the margin trading cost will continue to have its effect on the trade volumes and consequently lead to a decline in the gold prices in the near term. However, in the long run, the fundamentals for gold remain strong and investors will continue to invest in the precious metal until they find confidence to invest in the equity markets.

India and China, the largest consumers of gold, will continue to drive the demand. Indian domestic demand is seen robust in the near term and the Chinese government continues to increase its gold reserves. Meanwhile, the Chinese domestic demand for gold and silver continues to grow alongwith the increasing middle class incomes in the country.

Festive seasons can drive gold prices

Although, the yellow metal has rallied in the past few months, historically the demand picks up at the end of August. At the second half of the year, the demand is driven by the holiday seasons. The Indian new year comes around October boosting the domestic purchase of gold. Around year end during Christmas, the demand for gold jumps as well, which is followed by the Chinese new year in February.

In the near term, the gold mining companies may see a  decline in the spot prices, but with strong fundamentals, these companies are expected to post explosive results soon.

See our complete analysis for Barrick Gold’s stock here.

See our complete analysis for Newmont’s stock here.