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Stock Strategist Industry Reports

Gold Steady in Face of Rate Hikes

We maintain our view that the investment case for the yellow metal will weaken.

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At its June meeting, the U.S. Federal Reserve once again raised the federal-funds target rate by 25 basis points, to 1.75%-2%. In addition, the majority of officials at the central bank now expect four rate hikes in 2018, whereas at the March meeting they were evenly split between three and four hikes. The June rate increase was largely expected by the market, as options prices implied a more than 91% probability before the announcement. The market also appears largely unfazed by an additional rate hike this year, as gold prices remained largely flat.

This rate hike doesn’t change our view that the investment case for gold will weaken. We continue to expect the gold price to fall to $1,225 per ounce by the end of 2018 as the rising nominal interest rate environment increases the opportunity cost of holding gold. Additionally, although the recent rise in inflation bodes well for gold, we think that higher inflation will only spur a more rapid pace of rate hikes. As a result, our fair value estimates and economic moat ratings for all the gold miners we cover remain intact.

Kristoffer Inton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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