- More and more analysts are calling for $1,000 gold.
- The question is, even if gold does go to $1,000 is that a reason to sell gold stocks?
- According to the average price target of analysts, the answer is probably no.
I have not written about gold (NYSEARCA:GLD) for a while now. As per my previous posts, I am not concerned with gold itself but I do look at gold as a proxy for gold stocks.
To begin with, several weeks ago Goldman Sachs came out and reiterated its target for gold around $1,050. Let me say that $1,000 gold is number that has been talked about a lot over the past year or so, it's nothing new. In fact even I have mentioned this number as a possible target for gold in my articles last year.
The Goldman viewpoint is based on the possibility for real interest rates in the U.S. to rise. According to Goldman Sachs:
The potential for a meaningful decline in gold prices towards the level implied by 10-year TIPS yields, which our rates strategists expect to rise further this year, and reiterate our year-end $1,050/toz gold price forecast.
In other words, Fed tapering and the thus implied improvement in the U.S. economy is bearish for gold (and I agree with this thesis).
However, irrespective if Goldman is right or not about gold, the question is what will gold stocks do. Will they go down -- if gold goes down to $1000 -- or will they defy gold's price action and become independent of gold's trajectory (as I think they will).
Let me repeat why I think gold stocks will perform better than gold, irrespective of what gold does in the future. My basic theory is that gold companies will adjust to lower gold prices whether they like it or not (they have to). Meaning, they will cut corners, rethink their capex plans and use every opportunity to save money and rethink the way they use to do things.
Yes the adjustment might take several years, but in the end these companies will adjust to a lower gold price, simply because they have to, and because someone has to remain in business to bring gold out of the ground.
I realize that many companies have to mark down the value of their gold reserves. But the market has already taken into account such issues and discounted them already, even if many analysts have not (most have). The market is aware of this and has adjusted the gold stock space accordingly.
And yes, when analysts make their calculations into their models, they also take into account the possibility of gold going to $1,000. It is not a secret nor something impossible.
And because the average analyst consensus is one of the best ways that I know of, as to what might happen in the future, one way to see how a $1,000 gold price might affect gold stocks is to see what analysts have to say.
1-yr Trgt Price
12 Month Trgt Price
Silver Wheaton (NYSE:SLW)
Agnico Eagle (NYSE:AEM)
Kinross Gold (NYSE:KGC)
Gold Fields (NYSE:GFI)
Average percent rise predicted by analysts
The above table depicts the 10 biggest gold stocks by market cap. As you can see, the average forward 12 month price target for these stocks is about 20% higher than today. In the case of Silver Wheaton, Yamana and Kinross, analysts are particularly bullish setting price targets of 35%, 34% and 37% higher accordingly.
In my book, these are some aggressive and bullish price targets. And since I think analysts have taken into account the possibility of $1,000 gold, I have come to the conclusion that gold will probably not affect the possible trajectory of the gold stock space.
One way to play the sector is via individual stocks picks, but you can also buy a wide variety of gold stock ETFs available, such as the Gold Miners ETF (NYSEARCA:GDX). But if you are a little more aggressive, my preference is the Gold Miners Bull 3X Direxion ETF (NYSEARCA:NUGT), which makes for a great trading ETF also.