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Be ready to buy gold equities: J.P. Morgan

Most analysts are cautious on gold these days, especially since the market anticipates a rate hike from the U.S. Federal Reserve next week. But there is some mild optimism seeping into the forecasts for 2016, including the one from J.P. Morgan analyst John Bridges, who pointed out that gold has outperformed other commodities in 2015.

J.P. Morgan expects “several” rate hikes next year, which could be negative for the yellow metal. But Bridges noted there is a chance that rate hikes could significantly weaken the economy and prompt the need for more quantitative easing, which would be bullish.

“We feel investors should be ready with a small gold equity position in case this situation develops, or suggest they do their homework so they can react quickly should the forecast Fed rate rise damage the economy,” he said in a note.

Bridges pointed out that gold fundamentals are being aided by a shortage of new projects, and that the yellow metal is holding its own in currencies other than the U.S. dollar. In addition, lower rates in emerging markets or instability in the Middle East could create entry points for gold, he said.

J.P. Morgan is forecasting prices of US$1,104 an ounce for gold and US$15.55 an ounce for silver, which are not far above the current prices. As a result, Bridges does not think investors need to rush to buy gold stocks — they should just be prepared to do so if the environment turns more positive.

His stock picks include companies such as Goldcorp Inc. and Agnico Eagle Mines Ltd. that have healthy balance sheets, “predictable” production profiles and low political risk. He is more cautious about heavily indebted companies like Barrick Gold Corp.