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Will Gold's Recent Rally Last -- or Will It Evaporate?

NEW YORK (TheStreet) -- The gold market reheated today as prices of the yellow metal jumped close to 2% by the end of Wednesday's trading session. Moreover, gold ETFs, including SPDR Gold (GLD) and iShares Gold Trust (IAU), also rallied today and are up for the year. This recent recovery comes after gold prices fell during most of July.

Will gold's recent recovery continue over the short term? And what about the long term?

The main issue to impact the progress of gold is the recovery of the U.S. economy. In recent weeks, several key economic reports were positive, including the GDP for the second quarter, which grew by 4%, and the non-farm payroll report, which showed another gain of over 200,000 jobs during July.

The demand for investments like precious metals tends to rise when the U.S. economy isn't doing well. So if the U.S economy continues to show progress, this could steer more investors away from gold investments such as gold ETFs and gold producers like Goldcorp (GG) and Primero Mining (PPP).

In the meantime, the recent rally in gold prices helped pull up gold ETFs and other gold related assets: SPDR Gold rose by nearly $2 a share to $125.67, while shares of iShares Gold Trust jumped by 1.6% to $12.67 Wednesday. Gold producer Goldcorp also bounced back by 1.7% to $28.16 per share, and Primero Mining added 1.04% to its stock and settled at $7.80.

Looking forward, the Federal Reserve is likely to indirectly impact the direction of gold. If Fed Chair Yellen drops a hint in the next FOMC meeting on Sept. 17 regarding the timing of the next rate hike, this news could have a strong negative impact on the price of gold.

As long as the cash rate is close to zero, the demand for investments such as gold remains strong. This is because investors consider such assets as a safe haven against the devaluation of the U.S. dollar or a sudden rise in inflation. A rise in the Fed's cash rate will reduce the chances of a rise in inflation and the U.S. dollar will appreciate against leading currencies. This, in turn, is likely to bring down gold prices.

Therefore, the recent recovery in the gold market may not last long. If the FOMC were to make any big announcements in the next meeting in September about the timing of the rate hike, we could see a sharp fall in gold prices.

For further reading: 3 Ways to Invest in Silver

At the time of publication, the author held no positions in any of the stocks mentioned, although positions may change at any time.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates GOLDCORP INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate GOLDCORP INC (GG) a SELL. This is driven by a few notable weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, deteriorating net income, disappointing return on equity, weak operating cash flow and generally disappointing historical performance in the stock itself."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • GOLDCORP INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. During the past fiscal year, GOLDCORP INC swung to a loss, reporting -$3.30 versus $1.78 in the prior year.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Metals & Mining industry. The net income has significantly decreased by 68.3% when compared to the same quarter one year ago, falling from $309.00 million to $98.00 million.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Metals & Mining industry and the overall market, GOLDCORP INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • In its most recent trading session, GG has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. The fact that the stock is now selling for less than others in its industry in relation to its current earnings is not reason enough to justify a buy rating at this time.
  • Net operating cash flow has declined marginally to $273.00 million or 7.14% when compared to the same quarter last year. Despite a decrease in cash flow GOLDCORP INC is still fairing well by exceeding its industry average cash flow growth rate of -23.29%.

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