Australian investors are breathing a sigh of relief today. After two days of heavy losses, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has managed to climb back into the black following dovish comments from the US Federal Reserve overnight.
While most sectors in the market are trading higher today, none are faring as well as those companies operating in the gold sector after the precious metal's price spiked overnight. The spot gold price surged higher to around US$1,240 an ounce, up from about US$1,218 an ounce yesterday when the market closed.
The rally appears to have been sparked by comments from Janet Yellen, chairwoman of the US Federal Reserve. Following rather hawkish comments from other Fed Reserve members recently, Yellen reiterated her 'cautious' approach to lifting interest rates with the prospect of two (instead of four) rate hikes before the end of 2016.
The theory is, if interest rates stay lower for longer, gold remains a more attractive and viable investment than other assets offering yields that would likely improve if (or when) interest rates do increase. Meanwhile, lower interest rates typically mean a weaker US dollar which makes it cheaper for foreign investors to purchase gold, thus boosting its price.
Shares of the ASX-listed gold producers are soaring higher today as a result. Northern Star Resources Ltd (ASX: NST) is leading the way with a 5.6% gain, followed closely by EVOLUTION FPO (ASX: EVN) which has gained 5.5%.
Meanwhile, Newcrest Mining Limited (ASX: NCM) shares have risen 5.2% and Regis Resources Ltd (ASX: RRL) is up 5%. St Barbara Ltd (ASX: SBM), the wonder stock from 2015, has also gained 4.2% so far and is up an astonishing 807% over the last 12 months.
Although shares of the gold miners can perform strongly when the gold price rises, investors also need to bear in mind the impact a falling gold price can have. Gold prices are largely driven by fear and volatility around the globe and, when that fear subsides, so too can the price tag on the shiny metal.
It's impossible to tell where the gold price will be tomorrow, next week, or even next decade. While it could go much higher, it could also go considerably lower, and that's a risk investors need to acknowledge before they even consider buying into the sector.
