Gold investors breathed a huge sigh of relief overnight at the US's Federal Reserve surprise decision to hold off on cutting back its US $85 billion bond buying program. The expectation was for a reduction of between US$5 billion and US$10 billion per month, which had pushed the price of gold down to under US$1,300 per ounce just before the announcement.
However the revelation that the quantitative easing juggernaut will keep rolling on revived speculation that inflation could emerge and the US dollar could depreciate, driving a spike in the price of gold and other commodities.
Bloomberg reported that gold was up as much as 4.1%, to US $1,364 per ounce, after the announcement and the surprise jump in gold price caused shares in listed Australian gold producers to skyrocket.
Shares in Silver Lake Resources (ASX: SLR) were up as much as 11% before settling back to $0.85, up 9.7%. Kingsgate Consolidated (ASX: KCN) shares were up a crazy 18.9%, while Regis Resources (ASX: RRL) was up 7.6%.
The disproportionate rise in shares of gold producers compared to the increase in price for the metal suggests investors believe that the Federal Reserve's decision will result in increased appetite for gold going forward, encouraging the price up further.
Shares in Australia's gold mining titan Newcrest Mining (ASX: NCM) had a strong day with shares up 8%. It will be a relief to investors after the bad run Newcrest has had so far this year as the gold price retreated. The company's issues were compounded by a scandal around its adherence to disclosure policies and its nearly $6 billion in write-downs.
Shares in Newcrest are still down nearly 47% over the last six months, while the S&P/ASX 200 (ASX: XJO) (^AXJO) has risen 5%.
Foolish takeaway
The volatility seen in gold miners over the last three months will no doubt continue to reflect the ups and downs of the gold price. It has been a good day for gold producers, but the spending of US $85 billion per month cannot go on indefinitely and investors should be prepared for the response of gold when it does come to an end.
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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.
