For shareholders in the big banks, supermarkets, iron ore miners and oil producers, 2014 will be a year to forget.
However if you bought shares in leading gold producers Newcrest Mining Limited (ASX: NCM) and Northern Star Resources Ltd (ASX: NST), you'll be laughing all the way to the bank.
Throughout the year both companies have easily outperformed the ALL ORDINARIES (INDEX: ^AXAO) (ASX: XAO) index – which is actually down 3% for the year – by returning 37% and 57%, respectively in share price gains. This despite easing fears of rapidly rising inflation in the US.
Gold is a seen as a natural hedge in times of financial uncertainty. It is regularly quoted in USD per ounce.
Throughout 2013, the price of gold fell from US$1,600 per ounce to below $US1,200, taking gold miners' share prices along for the ride. Currently the shiny metal fetches approximately $US1,194 per ounce.
However for Australian producers (in AUD), such as Northern Star and Newcrest, the current spot price is actually a lot higher, thanks to a falling Australian dollar. Currently it is $1,467 per ounce, up 8.2% from the beginning of the year. This has provided some relief for their profit margins, and share prices.
Looking ahead
According to Morningstar, in the next three years analysts are expecting both Newcrest and Northern Star to increase earnings per share considerably.
However other than increasing global investor confidence (which usually reduces demand for gold), there's one particularly concerning outside threat to the gold price which investors much consider: Russia.
According to Bloomberg, Russia holds 1,169.5 metric tonnes of gold, around 10% of its foreign reserves. And with Russia's rouble falling drastically in recent times (following plunges in world oil prices and double digit inflation), some suggest the country could use it as a last resort to raise cash. This could put significant downward pressure on the gold spot price.
Buy, Hold, or Sell?
Despite a strong performance in 2014 by our two biggest and best gold miners, investors would be wise to leave them on their watchlists throughout 2015 and instead focus on finding other great companies trading at cheap prices. Companies which are not reliant on a volatile commodity price and pay reliable dividends year-in, year-out.
