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After a blockbuster start to the year, gold has fallen out of investors’ favor, thanks to rising interest rates and a strong dollar. The yellow metal logged in the sixth consecutive weekly decline and the worst weekly drop since December, shedding 2.2% last week. This followed the metal’s fourth consecutive monthly decline in July that represents the longest stretch of losses since 2013.
Notably, the bullion remained near 19-month lows and has tumbled 14% since its peak in April.
Inside the Decline
The slew of upbeat data has been raising confidence in the U.S. economy, bolstering the case for interest rate hikes. The Fed has raised interest rates twice this year in quarter-point increments and is expected to implement two more lift-offs by the end of the year. Higher rates have diminished the yellow metal’s attractiveness since it does not pay interest like fixed-income assets. Additionally, it has also provided a boost to the U.S. dollar.
America is expanding at a faster pace buoyed by historic tax cuts, infrastructure investment, higher government spending, deregulation, rising wages and record unemployment. The economy expanded 4.1% annually in the second quarter, representing the fastest pace of growth in nearly four years. Per Trump, “the United States is on track to hit the highest annual growth rate in over 13 years." A healthy economy is expected to pull in more capital into the country and lead to appreciation of the U.S. dollar.
Gold is generally viewed as a safe haven in times of economic or political turmoil. But the bullion recently lost its appeal as a safe-haven despite trade disputes and Turkish currency crisis since investors are looking at the dollar as a new safety investment in a strong economy. Additionally, rising equities tend to indicate investor appetite for riskier assets as opposed to traditional safe havens like gold.
Further, waning demand from the top two consumers, India and China, are also dampening the appeal for the metal. Fresh buying of gold has reduced, resulting in lower physical demand. While demand will likely remain subdued in China, given the trade dispute between the world’s two largest economies, India is seeing a pickup in consumption of the metal going into the wedding season and festive months ahead. According to the World Gold Council (WGC), demand will likely be healthy in the second half of the year on positive but uneven global economic growth, trade war and its impact on currency, rising inflation and an inverted yield curve.
Moreover, investors have been building bearish bets on the bullion. Per the latest Commodity Futures Trading Commission data, large precious metals speculators sharply cut back on their net positions in the gold futures markets last week to a new bearish level since Aug 13, 2002.
Added to the gloomy sentiment, the gold mining industry has a dismal Zacks Rank in the bottom 16%, indicating more pain for at least in the near term.
That said, a number of stocks have been crushed, piling up heavy losses so far this year. Below, we have highlighted five such stocks that have been hit badly in the gold rout and might continue their rough trading in the months ahead if similar trends prevail.
Timmons Gold Corp ALO – Down 78.6%
This gold mining company is engaged in exploration, development and production primarily in Mexico. The stock saw negative earnings estimate revision of 16 cents for this year over the past 90 days and is expected to generate earnings decline of 50%. It has a Zacks Rank #4 (Sell) and a VGM Score of C.