Is gold's record price run coming to an end? Here's how to tell.

MW Is gold's record price run coming to an end? Here's how to tell.

By Myra P. Saefong

Gold-backed ETFs, mining companies to benefit from further gold-price gains

The rally for gold is still going strong, with most analysts expecting to see further gains, but after 30 record-high settlements so far this year, investors should start to look out for certain signs of a potential top in prices for the precious metal.

"When the economy feels like it's trying to balance on a tightrope in a windstorm, investors flock to gold as their security blanket," said Adam Koos, president at Libertas Wealth Management Group. "It's like gold is the financial world's version of comfort food. When things get shaky, investors get stressed out - everyone reaches for it."

On Tuesday, gold for December delivery (GC00) (GCZ24) settled at a record $2,550.60 an ounce on Comex - the 30th all-time high settlement for most-active futures so far this year, according to Dow Jones Market Data. Prices also touched a new intraday record of $2,570.40 on Tuesday.

Cooling inflation and higher unemployment data indicate that the U.S. economy is slowing down, and has increased the likelihood that the Federal Reserve will start reducing interest rates this September, said Edmund Moy, senior IRA strategist for precious-metals distributor U.S. Money Reserve.

But potential rate cuts starting next month aren't the only factor lifting gold.

"Investors have continued to look to gold as a safe haven asset with greater geopolitical instability like the Ukraine and Russia conflict," said Moy, who's also a former director of the Treasury Department's U.S. Mint.

Also, as the Chinese economy continues to struggle with a declining stock market and real-estate prices, Chinese investors have "few other investment alternatives besides gold," he said. Central banks, meanwhile, have continued to be net buyers of gold - with all of these factors "increasing demand on an asset that is limited in supply."

Read: Gold prices keep breaking records in 2024. Central banks are driving the rally.

Caution signs

Still, the strength of gold's rise to never-before-seen heights, and its more than 20% climb year to date, may be raising some red flags for investors who may have missed the boat, or are considering chasing the rally.

"There are always signs of a top after a dynamic move like this," John Hathaway, senior portfolio manager at Sprott Asset Management U.S.A., told MarketWatch. "There will be pullbacks and corrections."

In terms of the "sustainability" of gold's rally, however, Hathaway said he'd "look to a lack of participation by U.S. and European investors and the general cluelessness of most investors."

Meanwhile, among the other signs to look for that suggest a top for gold prices, Libertas' Koos said to watch for a "shift in the economic winds."

If there's "stronger economic data, a cooling in inflation, or central banks taking their foot off the stimulus gas pedal, that could signal the peak - and potentially the beginning of a new age of sideways movement for the yellow metal," he told MarketWatch.

Investors should also look to geopolitical developments, which have so far contributed to gold's haven appeal.

"When Russia and Ukraine negotiate peace, as well as Hamas and Israel, and China's economy recovers, then there will downward pressure on gold prices," said U.S. Money Reserve's Moy.

Not there yet

Needless to say, the idea of peace seems a bit far fetched at this time.

Koos said he wouldn't be surprised to see another 3% to 5% move higher in gold before there's a pause in the rally, with prices likely to climb to $2,600 before a "plateau" for prices arrives.

That said, a top may just be a bit closer. The climb is getting "tougher" and the outlook will hinge on inflation, Fed Chairman Jerome Powell, and "whoever happens to win the [U.S.] presidential election in November," said Koos.

It's like driving on a road trip - you know you're near your destination when you start seeing signs every few miles," he said. "Right now, we're seeing those signs, but we're not pulling into the parking lot just yet."

Beneficiaries

Against that backdrop, there's a part of the gold market that investors may still find an opportunity to chase: gold-backed exchange-traded funds and gold mining companies.

If interest rates begin to decline, "money should continue to flow into gold-backed ETFs and the price of gold should rise," said Chris Mancini, associate portfolio manager of The Gabelli Gold Fund GOLDX at Gabelli Funds. SPDR Gold Shares GLD is the largest gold-backed ETF.

Mining companies are also generating "substantial amounts of free cash flow at these levels," said Mancini, whose gold fund invests in stocks of mining companies. If gold prices stay at current levels, free cash flow and dividends will grow and the stocks should "perform very well."

Mining companies can use that free cash flow to pay dividends to investors and grow their business, he said.

The average cost to mine gold in the mining industry is around $1,350 an ounce, he said. So at a price of around $2,550, gold mining companies are generating a "very large operating margin and profit margin when they mine an incremental ounce of gold."

Given all that, Mancini said gold mining companies should "outperform the price of gold on the upside."

As their free cash flow starts to grow, "they're able to pay bigger dividends, they're able to grow more quickly, and the free cash flow should build on itself," he said.

-Myra P. Saefong

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August 21, 2024 12:09 ET (16:09 GMT)

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