Canadian research firm BCA Research believes the recent correction in gold prices may have concluded, with major macro headwinds that had been suppressing the metal gradually weakening. The firm suggests that U.S. real interest rates have likely peaked, and the dollar could shift from a headwind to a tailwind, driving gold prices higher.
After adjusting its gold position to neutral in the spring, BCA Research now reports that the market presents more attractive opportunities. "The worst headwinds from real interest rates for gold may already be behind us," the firm stated in a report. While geopolitical risks in the Middle East could still cause short-term volatility, BCA expects U.S. real rates to remain relatively stable in the coming months, providing a support base for gold prices.
Real Interest Rates as the Key Variable: Gold Can Rally Without Rate Cuts
Roukaya Ibrahim, BCA's chief commodity strategist, advised investors in a Kitco News interview to focus less on headline inflation and more on real yield trends. "Based on the fact that real rates and the dollar are not going higher, the headwinds have dissipated," Ibrahim said. She noted that gold has held above the $4,000 per ounce level despite macro pressures, indicating strong underlying support.
BCA argues that after years of growing central bank gold purchases impacting the market, gold has re-emerged as an asset primarily driven by macro factors. Real interest rates and the dollar have regained their role as core variables influencing gold price movements, while central bank buying now serves more as a floor for prices rather than a catalyst for further gains.
Regarding the market's pricing of additional tightening by the Federal Reserve, Ibrahim believes the Fed is unlikely to deliver more than what is already anticipated. "Even if the Fed were to raise rates, I don't see them exceeding the market's expectations," she said. She described the probability of such a scenario as "quite low," barring a sustained surge in oil prices that significantly boosts inflation expectations.
Ibrahim emphasized that gold does not require immediate rate cuts to rally; it only needs confirmation that the peak in real yields is behind us. "The opportunity cost headwind will diminish and turn into a tailwind—not because the U.S. economy is about to collapse, but because tightening has already been priced in," she added.
BCA also noted that the widespread view of gold as an inflation hedge is overestimated. The firm stated that inflation itself does not directly drive gold prices higher; gold benefits only when inflation erodes confidence in the Fed and leads to lower real yields. "Gold's role as an inflation hedge is overstated. What determines gold's performance is real interest rates, not inflation," BCA said in its report. If inflation expectations remain stable and the Fed maintains policy credibility, higher initial inflation could actually raise real yields, putting pressure on gold.
Even in the event of a new oil-price-driven inflation shock, Ibrahim believes any rise in real yields would be temporary. "If there is a price spike and an inflation surge, the market's focus will likely shift quickly from the inflation narrative to the growth narrative," she said. This shift, she argued, would ultimately limit the Fed's room for further tightening and help establish a price floor for gold.
Beyond macro factors, BCA sees long-term structural support for gold from global reserve diversification and sustained central bank buying. While the firm believes the pace of central bank purchases may have peaked, ongoing official sector buying still provides a reasonable basis for gold to maintain elevated levels. BCA stated that unless global central banks become net sellers, these structural factors should prevent gold from falling back to 2022 levels. Meanwhile, the firm expects the dollar to gradually weaken over time due to accumulating structural pressures. "The dollar will shift from a headwind to a tailwind for gold," BCA concluded in its report.
Gold Mining Stocks Undervalued vs. Broader Market, Offering Alternative to AI
Noah Weisberger, BCA's chief strategist, also told MarketWatch that the recent rally in gold and gold mining stocks makes sense, reflecting investor concerns about the inflation outlook and the disinflation process. He believes that if worries about the Fed's credibility persist, gold could rise further, possibly retesting record highs.
Weisberger noted that investor concerns increased after Fed Chair Kevin Warsh's July press conference. "We haven't given him much latitude," Weisberger said of Warsh. "If inflation persists, any erosion of the Fed's credibility will be reflected in higher gold and gold mining stock prices." He added that a key reason to increase gold or gold mining stock exposure in a portfolio is the risk facing the bond market.
Some large gold mining companies trade at relatively low valuations compared to their earnings. The VanEck Gold Miners ETF (GDX), one of the largest ETFs in the sector, manages $25.4 billion in assets. This passively managed fund holds 59 gold mining stocks from nine countries. While investors typically focus on forward price-to-earnings ratios, trailing earnings are also relevant for gold miners sensitive to price volatility.
FactSet data shows that, by weight, the GDX ETF has a trailing P/E ratio of 14.1 and a forward P/E ratio of 10.4. In contrast, the S&P 500 trades at a trailing P/E of 28.1 and a forward P/E of 20.2. Weisberger highlighted that the low valuation of gold mining stocks is noteworthy, as many companies have improved margins and strengthened balance sheets. "The biggest risk is the gold price itself, but gold mining stocks offer a fairly pure equity allocation, which is why we like them," he said.
He believes gold mining stocks not only provide macro risk hedging but also help diversify equity portfolios. "If you're looking for a diversified bet within the equity market, GDX is not correlated with any AI theme we can identify," Weisberger added. "In a market driven by companies with negative cash flow, holding some cash-generating companies in your portfolio is a good balance."
The market continues to watch whether gold's rally can be sustained and whether gold mining stocks will benefit from the price recovery. GDX's top 10 holdings all have majority "buy" or equivalent ratings from analysts, with LSEG surveys showing upside potential for target prices over the next 12 months.
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