(Kitco News) - The gold market has been trading sideways for the last four months. Despite the lack of momentum, one research firm continues to recommend buying gold on dips, maintaining that the structural bull market is far from over.
In her latest gold report, Roukaya Ibrahim, Chief Strategist at BCA Research, said she is retaining her long-gold bias and recommends that investors also consider adding mining stocks to their portfolios.
Ibrahim explained that gold price gains are supported by more than just cyclical momentum; long-term structural factors, including growing investment demand and robust central bank purchases, continue to support higher prices.
Despite heightened volatility, the precious metal has managed to hold critical support around $3,300 an ounce, even in the face of significant headwinds such as record-high equity markets and elevated bond yields.
“The fact that the yellow metal’s rally has defied headwinds from key cyclical drivers suggests that the bull market is structural, not cyclical,” Ibrahim said in her note. “Gold’s remarkable resilience since mid-April also corroborates this view. Despite overbought conditions (technical headwinds), the yellow metal has managed to hold on to its gains. This suggests that buyers are stepping in on dips and bullion is held by ‘strong hands.’”
Looking ahead, Ibrahim said she expects gold to “break its chains” once the Federal Reserve begins cutting interest rates.
Markets anticipate the Fed will start easing monetary policy in September, followed by two additional rate cuts before year-end.
“Gold’s price surge over the past three years has occurred despite the cyclical headwinds of elevated US real interest rates and an appreciating USD. We expect these headwinds to soon morph into tailwinds, catalysing another major upleg in bullion prices,” Ibrahim said. “Real rates will roll over as the US labor market slows and/or the Trump administration succeeds in forcing the Fed to shift to an overly dovish policy.”
Along with falling real interest rates, the Montreal-based research firm also expects further weakness in the U.S. dollar, creating another tailwind for gold.
“The greenback is likely to resume its depreciation over the coming months. As BCA’s Emerging Markets team has recently been arguing there is a budding paradigm shift in global currencies which could see the US dollar become pro-cyclical,” Ibrahim said. “Going forward, the US current account balance will be the main driver of the US dollar. In this context, the dollar will depreciate as net foreign portfolio capital and financial inflows fall short of the desired US current account deficit.”
Stock markets are the final piece of gold’s puzzle through year-end, and BCA expects gold to outperform global equities as the global economy continues to slow.
“As economic growth conditions deteriorate, we expect the tailwind from stronger investment and central bank demand to offset the headwind from jewellery and technology demand for gold,” she said.
As gold prices continue to rise, Ibrahim expects gold equity markets to attract more investor attention due to their record margins and free cash flow.
“The profits of gold mining stocks are high beta to the underlying commodity. Therefore, a continuation of the gold price rally will boost their earnings and translate into higher share prices. Notably, the rally in gold mining stocks has yet to outpace the yellow metal’s gains,” she said. “Although gold miners’ operating profit margins have been expanding, their valuation multiples have been stagnant at very low levels. This disparity is even more prominent when compared with the global overall equity index. Even though gold miners’ operating multiples have outperformed those of the overall global stock index, the relative forward P/E ratio has fallen. This discrepancy is unsustainable and will be corrected via an outperformance of gold mining over the coming years.”
