What: Gold prices rose the most in nine months in overnight trade. The precious metal traded as high as $US1,321 an oz, a rise of $US43 from yesterday's close in Australia.
So What: Gold moves in mysterious ways. There aren't nearly enough crutches in the world for all the lame excuses offered for its rise and fall. Opinions were sought from the "experts" overnight and some of the following causes, ranked in my order of importance, were as follows:
1. The US Federal Reserve cut its US growth forecast for 2014 from 2.9% to around 2.2%. As a result, they signalled support for the economy by continuing a near-zero interest rate policy to bolster the economy.
2. The US dollar index fell as market players had assumed an interest rate rise. This had two flow-on effects. Traders had to reverse short positions and a falling US dollar generally results in a rising gold price.
3. US President Barack Obama is considering "targeted precise" action in Iraq.
In a recent article, I advocated that gold should be included in share portfolios to provide insurance against deflation (see point No 1 above), international conflicts (see point No 3 above) and inflation.
Now What: There are a range of beaten-down gold stocks due to a gold price slide from $US1,320 to $US1,240 an oz during the period April 10 to June 17.
In my opinion, while they may rally the most initially (given they have fallen the most), gold stocks that have had recent operational or company specific problems, should be avoided. These include Newcrest Mining Limited (ASX: NCM), Regis Resources Limited (ASX: RRL) and Medusa Mining Limited (ASX: MML) they fell 9.6% and 45% and 10% over the period of the gold price decline. By contrast Independence Group NL (ASX: IGO) and Beadell Resources Ltd (ASX: BDR) were resilient and are more likely to be excellent medium-to-long term investments.
It should also be noted that BHP Billiton Limited (ASX: BHP) provides some limited exposure to silver, which also rallied to hit a three-month high overnight.
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