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Gold Price Pop on Powell's Rate Cut Signal: 5 Top Picks

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Gold price recouped losses and hit one-week high after Fed chairman Jerome Powell gave strong signals of an impending cut in benchmark interest rate later this month. Gold price skyrocketed in June after remaining range bound in the first five months of this year. The rally was primarily driven by three macro factors -- a dovish Fed and other major central banks, trade-related conflict across the world and fears of a global economic slowdown.

Fed Signals an Impending Rate Cut

On Jul 10, in a testimony to the House Financial Services Committee, Powell said that the United States is suffering from a bout of uncertainty caused by trade tensions and weak global growth. He added “Crosscurrents have reemerged. Many FOMC participants saw that the case for a somewhat more accommodative monetary policy had strengthened.”

Per Powell, a series of recently released economic data and developments indicate that tensions related to world trade and global economy will continue to weigh on the U.S. economic outlook.

The Fed chair noted that while the U.S. jobs market remains robust and consumer spending may have rebounded in the second quarter, business investment, housing investment and manufacturing output weakened considerably. Inflation is likely to stay below the Fed’s 2% target rate for the time being.

Powell reiterated Fed’s commitment to act as appropriate to sustain U.S. economic expansion, providing a clear message for a rate cut possibly in the upcoming FOMC meeting scheduled on Jul 30 - 31. At present, 100% respondents of CME FedWatch are expecting a 25 basis-point reduction in interest rate in July.

U.S. Dollar Price Declines, Government Bond Yield Rises

Powell’s Congressional testimony, the ICE U.S. Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, fell 0.4% to 96.83 after closing at 96.91. Expectation of low interest rate made U.S. dollar less attractive to investors.

At the same time, yield on benchmark 10-year U.S. Treasury Note rose slightly to 2.065%, as investors opted for equities. Low interest rate will reduce the cost of funds. Consequently, businesses will be able to borrow a cheaper rate raising the level of investment in the economy. Similarly, investors will have access to cheaper funds to invest in risky assets like equities. All the three major stock indexes --- the Dow, S&P 500 and Nasdaq Composite hit record high levels on Jul 10.

Gold Price Popped Up

Fed’s rate cut signal had a strong positive effect on the stock market while it dampened the dollar and bond price rally. The combined result of all these factors resulted in a surge in gold price. Spot gold was up 0.4% at $1,424.21 per ounce after previously hitting its highest since Jul 3 at $1,426. Moreover, U.S. gold futures for August delivery jumped 1.1% to $1,424.36.

Lower interest rates lower the opportunity cost of holding nonyielding bullion, making gold cheaper for investors holding other currencies. In addition to gold, prices of silver and platinum rose 0.3% each, while the price of Palladium gained 0.3% after hitting its highest on Mar 22. Buying pressure on gold is likely to remain firm as investors will focus on precious metals as a store of wealth and hedge against market turmoil.

Our Top Picks

At this stage, it will be prudent to invest in gold stocks with strong growth potential. We have narrowed down our search to five such stocks, each of which carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below shows price performance of our five picks year to date.

Franco-Nevada Corp. (FNV - Free Report) is a gold-focused royalty and stream company with additional interests in platinum group metals and other resource assets. The company has expected earnings growth of 13.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.5% over the last 30 days.

Royal Gold Inc. (RGLD - Free Report) acquires and manages precious metal streams, royalties and related interests, with a primary focus on gold. The company has expected earnings growth of 34.5% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.3% over the last 30 days.

Rio Tinto Group (RIO - Free Report) is an international mining company with interests in mining for aluminum, borax, coal, copper, gold, iron ore, lead, silver, tin, uranium, zinc, titanium, dioxide feedstock, diamonds, talc and zircon. The company has expected earnings growth of 38.7% for the current year. The Zacks Consensus Estimate for the current year has improved by 5.4% over the last 30 days.

SSR Mining Inc. (SSRM - Free Report) engages in the acquisition, exploration, development and operation of precious metal resource properties in the Americas primarily explores for gold and silver deposits. The company has expected earnings growth of 87% for the current year. The Zacks Consensus Estimate for the current year has improved by 22.9% over the last 30 days.

BHP Group plc (BBL - Free Report) engages in mining of copper, silver, lead, zinc, molybdenum, uranium, gold, iron ores, metallurgical and energy coal. The company has expected earnings growth of 40.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 9.7% over the last 30 days.

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