5 Gold Stocks To Buy On October's Rate Cut Hope

Gold prices moved downward for nearly one month after witnessing an impressive rally in during the June-September period. However, recent softness in gold prices may be a good entry point for another rally expected from the beginning of next month. Trade-related conflict between the United States and China is far from being completely settled. Meanwhile, slowing pace of U.S. economic growth and global economic downturn are near-term concerns.

Against the backdrop of these headwinds, market participants are widely expecting a third rate cut by the Fed this month. Lower interest rates decrease the opportunity cost of holding non-yielding bullion, making gold cheaper for investors holding other currencies. 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.

Slowing Pace of U.S. Economic Growth

The U.S. GDP in the second quarter of 2019 was 2%, well below the 3.1% rate achieved in the first quarter. What is more important is that, the latest estimation of the Atlanta Fed released on Oct 17, reported just 1.8% GDP growth for the third quarter.

U.S. retail sales in September fell 0.3%, its first decline since February. Core retail sales declined 0.1%. Core retail sales data is highly correlated to the consumer spending component of the U.S. GDP, which constitutes 66-70% of the country’s economy.

Moreover, U.S. manufacturing, which constitutes 12% of its GDP, contracted in the last two months. Lingering tariff war with China raised input costs for high-end U.S. products, resulting in slowing business investment. Furthermore, labor market, which remained robust despite trade jitters also witnessed lower job growth in September.

Global Economic Downturn

On Oct 15, The International Monetary Fund (IMF) reduced its growth forecasts for the global economy for 2019 and 2020. It predicts growth of 3% for 2019, down from its previous forecast of 3.2%. The world economy is expected to witness slight growth in 2020, lower than its previous projection of 3.5%. Moreover, the World Bank also squeezed its global growth forecast for 2019 to 2.6% from the previously forecast 2.7% growth.

On Sep 19, the Organization of Economic Co-Operation and Development (OECD), projected that the world economy will grow just 2.9% in 2019, the lowest forecast since 2009. The OECD had forecast 4% global growth in 2019 just 18 months ago.

Notably, China’s third-quarter 2019 GDP growth came in at 6%, lowest in 27 and half years. Several large economies of Eurozone, Japan and various emerging markets are also suffering from lower export demand due to the prolonged trade conflict between the two largest trading countries of the world.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Will Fed Opt for Third Rate Cut in October?

On Oct 8, Jerome Powell gave signals of a possible third rate cut this month. The FOMC is scheduled to meet on Oct 29-30. The central bank already reduced the benchmark lending interest rate by 50 basis points in two equal tranches in July and September. Rate cut happened for the first time in more than 11 years. Notably, as of Oct 24, the CME FedWatch assigned 93.5% probability of a 25 basis point rate cut in October while just 6.5% expects status quo to be maintained.

Powell cited a slowdown in the job growth rate and muted inflation along with global economic slowdown, due to the U.S.-China trade war, as the primary reasons for a likely third rate cut this year in order to honor the pledge to do the needful to sustain U.S. economic expansion.

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, which have skyrocketed year to date and still have upside left. Each of these stocks carries a Zacks Rank #1 (Strong Buy). You can see Zacks Investment Research

Written By: Zacks Investment Research