Australia's gold mining shares are plummeting again today, extending on the heavy losses many endured on Thursday.
At the time of writing, the country's biggest gold miner, Newcrest Mining Limited (ASX: NCM), had fallen 6.2%. EVOLUTION FPO (ASX: EVN) was down 3.1% as well, with Regis Resources Limited (ASX: RRL), Silver Lake Resources Limited. (ASX: SLR) and St Barbara Ltd (ASX: SBM) all down between 4.9% and 9.7%.
OceanaGold Corporation (ASX: OGC) and Perseus Mining Limited (ASX: PRU) are faring even worse: they're down 10.2% and 21.7%, respectively.
The heavy falls across the sector are the result of a cratering gold price. Indeed, one ounce of the shiny metal is now fetching just US$1,127, down from US$1,142 yesterday afternoon and from more than US$1,300 early in November.
The most likely catalyst for the decline in the price of gold itself this week is the interest rate hike announced by the US Federal Reserve on Wednesday night (Sydney time). It voted to increase the base interest rate by 0.25%, to between 0.5% and 0.75%, in what was the first rate hike of 2016 and only the second in the last decade.
While the interest rate hike was largely expected – and already priced into the markets – investors may have been caught off guard by the board's more hawkish position for future interest rate increases. Indeed, they forecast up to three interest rate hikes in 2017, whereas many in the market were expecting just two.
Rising US interest rates are an indication that the US economy is improving, thus reducing some of the market's uncertainty. At the same time, higher US interest rates should act to strengthen the US dollar, making it more expensive for international buyers to purchase gold – because gold is quoted in US dollars.
Indeed, many investors had piled into gold in the wake of Donald Trump's shock victory in the US presidential election, as they believed his victory would send the precious metal's price skyrocketing. While most thought that would be a profitable trade, those people have instead had big holes burned in their pockets.
Investing in gold may be seen as a safe move during times of uncertainty. But investors need to recognise how difficult it is to predict the movements of the metal's price and thus, how risky an investment in the sector can actually be.
