Gold Price Momentum Stalled By Fed Expectations

London (Oct 13)  The momentum gold experienced in August carried over into early September. Geopolitical tension continued as South Korea reacted to possible preparation by North Korea for an intercontinental ballistic missile launch. The U.S. Dollar Index (DXY)1 fell to new lows (levels not seen since early 2015) when the European Central Bank (ECB) increased its growth forecast and indicated it would begin discussing a tapering strategy for its quantitative easing policies in October. This drove the gold price to its high for the year at $1,357 per ounce on September 8. However, for the remainder of the month, the Federal Reserve (Fed) once again became the primary driver of gold prices, as interest rates and the dollar began to trend higher. After its September 19 Federal Open Market Committee (FOMC) meeting, the Fed announced plans to gradually allow its $4.5 trillion bond portfolio to run off. It also forecast one more interest rate hike for 2017. Then, following a September 26 speech, the market became further convinced of a December rate increase when Fed Chair Janet Yellen endorsed continued monetary tightening in spite of a subdued inflation outlook. As a result gold trended lower, ending the month at $1,280.15 per ounce for a $41.25 (3.1%) loss.

Gold Companies Focusing on Positive Price Trend, Capital Discipline, and Growth

Gold stock indices also traded near their highs for the year, but then followed the gold price lower. During September the NYSE Arca Gold Miners Index (GDMNTR)2 retreated 6.5%, while the MVIS Global Junior Gold Miners (MVGDXJTR)3 fell 6.2%. There was little concern over September price weakness at the annual gathering of gold companies and institutional investors at the Precious Metals Summit and Denver Gold Forum. Managements from essentially every gold producer and most gold developers attend these events, and this year the focus was on the longer-term positive price trend. At the Denver Gold Forum, the majors reiterated their commitment to capital discipline and maintaining low costs. We were especially pleased with Newmont Mining's (NYSE:NEM) (4.7% of net assets*) decision to consider raising its dividend yield to approximately 2% (gold stocks generally carry yields well under 1%). It looks like the industry may be gaining the financial strength to offer yields that outperform gold's 0% yield which may attract more investors.

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