Fed’s Decision Weighs on the Prospects of Gold Mining Companies

by Trefis Team
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Gold prices have plunged roughly by 4% after reaching a one-year high amid the uncertainty prevailing in the Korean peninsula. Gold prices are expected to remain under pressure with improving economic conditions and the increasing probability of interest rate hike in the US. A prolonged period of subdued gold prices would have an unfavorable impact on the top line of gold mining companies.
 The plunge in gold prices can mainly be attributed to the outcome of the two day US Federal Open Market Committee (FOMC) meeting held on 19th and 20th Sept. 2017, coupled with the recent tax reform announcement made by President Trump. [1]  Despite having kept the policy rate unchanged, gold prices took a hit as approximately 60% of Fed officials have directed towards an interest rate hike in the December FOMC meeting. [2]

Gold is considered to be a safe-haven asset for investment and most of its volatility is driven by global macroeconomic and geopolitical uncertainty. Gold prices have recently reached their one-year high during the first week of September, 2017 [3] primarily due to increasing uncertainty regarding North Korea’s nuclear agenda along with the economic disruption caused by hurricanes Irma and Harvey.

With the US seeking diplomatic resolution to the North Korean situation [4] and limited political risk pertaining to the election outcome of the European regions, the upside for gold prices in the long run becomes limited.

Additionally, the Fed’s decision to cut $10 billion each month from October ’17 to reduce its approximate $4.2 trillion holdings in US Treasury bonds and Mortgage backed securities in order to reduce its balance sheet [2], would lead to strengthening of the US dollar and a further fall in gold prices as the yellow metal would become more expensive with respect to other currencies.

The fall in gold prices would have a major impact on the revenues of major gold mining companies such as Barrick Gold, Newmont Mining, and Gold Corp who are already coping with an environment of diminishing revenues and preparing themselves for future subdued gold prices by systematically investing in mines which would reduce their all-in sustaining cost (AISC) and also by restructuring their debt.

However, Geopolitical Uncertainty Still Prevails

In spite of these supportive arguments, certain factors such as a sudden outbreak by Kim Jong-un in the Korean peninsula or weak US inflation data might change the movement of gold prices in the near term. Additionally, the possibility of the US Fed Chairperson, Janet Yellen stepping down in February ‘18 might change the perspective of the US Fed altogether and lead to an upside for gold prices. However, the sustainability of such a price hike is questionable.

Have more questions about Barrick Gold? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Barrick Gold

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Notes:
  1. Trump says GOP tax reform plan will create ‘revolutionary change’, CNBC []
  2. Fed keeps U.S. rates steady to start portfolio drawdown in October, Reuters [] []
  3. Gold nears 12-month high on North Korea tensions but experts warn it could soon reverse, CNBC []
  4. Military option for North Korea not the first one: Donald Trump, LiveMint []
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