Gold bulls must have been licking their lips yesterday as the precious metal roared above US$1,300 an ounce, but the excitement was short-lived. The metal fell sharply overnight and is now fetching just US$1,281, reflecting a more settled market place.
Indeed, the price of gold is largely driven by fear and uncertainty. There have been plenty of both of those in recent times with investors around the world fretting ahead of Britain's potential exit from the European Union – fittingly known as 'Brexit'.
However, those fears subsided overnight with the odds of Britain actually leaving the European Union diminishing. It still looks set to be a close call, but those fears have at least eased, for now.
That in itself is one of the key risks investors must assume when investing in the gold sector. The gold price has rallied hard since late last year on the back of heightened uncertainty, but when those fears diminish, so too can the price of gold.
Shares across the sector are certainly paying the price today. In fact, five of the seven biggest losers from the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) today operate in the industry, with St Barbara Ltd (ASX: SBM) being the worst of the lot. Its shares are down 9% so far.
Meanwhile, Northern Star Resources Ltd (ASX: NST) shares are down 3.7%, EVOLUTION FPO (ASX: EVN) is down 3.7%, Regis Resources Limited (ASX: RRL) has fallen 3.3% and Newcrest Mining Limited (ASX: NCM) is down 2.3%.
Outside of the ASX 200, Silver Lake Resources Limited. (ASX: SLR) and Perseus Mining Limited (ASX: PRU) shares have also dropped 4.5% and 5.3%, respectively.
Despite today's losses, the gold sector has still produced some enormous returns since the beginning of the year, and some investors may be tempted to buy in on today's decline. What those investors should remember, however, is that the gold price is no certainty to continue rising. And if it does fall from here, shares across the sector could be hit hard as well, just as they have been today.
Volatility can be a scary thing in the short-term, but it will pass. And when it does, long-term investors will want to hold the highest quality businesses with the best potential for solid returns. In my mind, there are plenty of great alternatives outside of the gold space.
