Gold is a tricky thing. While there are myriad uses for gold in jewellery and industrial applications, a significant portion of the world's total gold is doing precisely what you are doing in your chair right now – i.e. not much.
The precious metal is held in large quantities by central banks, some managed funds, and individual investors as a hedge against risk and inflation, and its value usually jumps around in response to global issues like the possible Greek Eurozone exit or the recent tragedy in Paris.
Listed companies Newcrest Mining Limited (ASX: NCM), EVOLUTION FPO (ASX: EVN), and Regis Resources Limited (ASX: RRL) have all seen strong price performance recently, and their shares popped again this morning as investors weigh the potential profits to be gained from global uncertainty and an increase in US interest rates.
An increase in US interest rates would ordinarily be enough to scare investors away from gold, because alternatives like bonds and savings accounts become more attractive. Similarly, rising interest rates could indicate an improving economy, which reduces the economic uncertainty that can be an attractive reason for buying gold.
However, rising US rates could also lead to weakness in the Australian dollar – as investors leave Australia to chase returns in the US – which could make our Australian gold miners more attractive, given that their sales are denominated in US dollars.
Despite the value of gold being down 9% for the year, many Australian miners are making decent profits thanks to the low Australian dollar. A number of these miners also appear relatively cheap, although this could be illusory given that the commodity will become less attractive as the global economy stabilises.
Investors will likely be better served by investing their funds into one of the many other attractive investment opportunities on the ASX right now.
