(Kitco News) – Financial markets are expecting to see the third U.S. interest-rate hike this year in another week, which would be the eighth in the current tightening cycle, but one gold market analyst says this could eventually lead to higher gold prices.
In a recent report, Joe Foster, portfolio manager and strategist for the VanEck Gold and Precious Metals Strategy, warned that tighter monetary policy is reducing liquidity in financial markets, which in turn is putting pressure on weak emerging markets.
Although all the focus is on next week’s Federal Reserve meeting, Foster said that all major central banks are looking to tighten monetary policy. He noted that the Bank of England has stop easing, while the European Central bank is expected to end its bond-purchase program in December and could start raising rates next year.
Last month’s EM currency crisis, sparked by economic uncertainty in Turkey, is a symptom of a much larger issue, Foster said.
“As the liquidity that fueled the expansion is slowly drained away, those areas of the financial system that are most vulnerable will be the first to fail,” he said. “We believe Turkey was the first domino to fall, with its years of monetary mismanagement and over-borrowing made possible by low rates and ample liquidity.
“As central banks continue to tighten, we expect more Turkeys to come out of the woods. The U.S. may find it hard to remain an island of prosperity,” he added.
Foster added that in this environment, investors could turn to the yellow metal for its safe-haven qualities.
“Gold is a unique asset class due to its uncorrelated nature and its ability historically to perform well amidst global financial turmoil,” he said. “We think of it as financial insurance. Like health or auto insurance, a small allocation can go a long way when hardship occurs.”
Although Foster expects to see higher gold prices by the end of the year, he said that in the near term the market could continue to consolidate around $1,200 an ounce. He added that the current gold prices could continue to support gold producers. December gold futures last traded at $1.207.10 an ounce, up 0.36% on the day.
“Most gold companies have ample flexibility to weather a slump in gold prices. Debt has been reduced to levels that are manageable at lower gold prices and many companies have no net debt,” Foster said. “The average all-in mining cost for the majors and mid-tiers is around $835 per ounce.”
Quoting research from Bank of America Merrill Lynch, Foster said that at current prices gold producers see aggregated industry free cash flow of about $2 billion this year. He added that prices would have to drop to $1,100 an ounce for the sector to no cash flow.
By Neils Christensen
For Kitco News