The price of gold has been thrust back into the headlines this week as the world prepares for a potential interest rate rise from the US Federal Reserve. Undoubtedly, a rate rise would be bad news for gold, since it would make other income-generating assets more appealing on a relative basis and it would also cause an appreciation in the US dollar, to which the gold price is negatively correlated.
As a result of this, a number of investors are understandably wary about buying gold or gold mining companies ahead of what could be a volatile period for the precious metal.
However, in a number of cases, a rise in US interest rates this week is already priced in. That’s because the Fed has repeatedly stated that a rate rise before the end of 2016 is likely and, as such, the price of gold may not react all that unfavourably in the short term to news of a tightened US monetary policy. Furthermore, the Fed appears to be adopting a slow and steady view to rising interest rates, thereby making a sharp increase in the borrowing rate rather unlikely in 2016 and beyond – especially with inflation continuing to be relatively low.
So, gold may prove to be a better performing asset than is currently expected although, even if it does have a disappointing period, the likes of Randgold Resources (LSE: RRS) and Centamin (LSE: CEY) still appear to be worth buying. That’s because the two companies have relatively wide margins of safety as evidenced by price to earnings growth (PEG) ratios of 1.3 and 0.6 respectively.
And, with the two companies forecast to increase their bottom lines by 21% and 19% respectively next year, they appear to have positive catalysts to improve investor sentiment in 2016, which makes them sound long term purchases at the present time.
Meanwhile, the outlook for oil remains very downbeat. The glut of supply which has been present throughout 2015 is showing little sign of being reduced and, as such, buying a slice of Gulf Keystone Petroleum (LSE: GKP) could prove to be a risky move for 2016.
That risk is, of course, exacerbated by Gulf Keystone Petroleum’s lack of geographic diversity, with it being centred on northern Iraq/Kurdistan. This means that even though the company has a highly appealing asset base which offers superb long term profit potential, its shares appear to be rather unappealing at the present time.
Furthermore, the political situation in the region has the potential to worsen and, even though three payments in a row have been received for oil exports, there are still major question marks over future payments as well as monies owed from previous exports. As such, Gulf Keystone petroleum’s price to book value (P/B) ratio of 0.9 may be low, but other resources companies appear to have more enticing risk/reward ratios at the present time.
