Over the past two weeks, four of the top five gainers in the S&P/ASX 200 Index (ASX: XJO) (Index: ^AXJO) were gold mining companies. Gains ranged from 18% for Newcrest Mining Limited (ASX: NCM) all the way up to a whopping 43% for stock in Beadell Resources Ltd (ASX: BDR).
That begs the question whether gold could keep its recent rally going. Is this a turnaround story after gold has gone sideways since mid-2013?
Gold spot price – CBOT Gold (COMEX)
Source: nasdaq.com
Here are three factors that could be catalysts for gold's recent rise.
– Oil has tanked so quickly over the last six months
There has been no real reprieve from the more than 50% drop in Brent crude prices. It slipped under $US50 a barrel last week and stands at US$50 currently. Some traders and large investors may be scurrying for cover in gold.
– ECB moves closer to QE
It may soon be time for the ECB president Mario Draghi to announce Europe's own quantitative easing (QE) program. This may benefit European stock markets, but it could drive the Euro to parity with the US dollar. The Euro has been weakening since May 2014 when the exchange was about US$1.38 to the Euro. Last Friday it slipped under US$1.16 vs the Euro.
The move may make investment funds flow to the US currency, but others may seek security in the yellow metal.
– Swiss Franc de-pegging brings forex dealers to their knees
The Swiss central bank made the shock decision to remove the currency peg it placed on the Swiss Franc three years ago to support its currency and hold it at 1.20 Swiss Francs to the Euro. With the ECB expected to start its QE program soon, the central bank will now let the Swiss Franc move freely in the open market because it will become too expensive to maintain the peg.
This wreaked havoc on foreign exchange markets, sending some big name forex dealer companies into bankruptcy from massively leveraged losses. That has shaken the market's confidence. When that happens, investors sell now and ask questions later. Gold, even at low prices, looks a lot safer.
No one is really expecting a kind of GFC-like scenario that could drive gold back up to 2011 highs close to US$1,900 an ounce. It more likely will be a very slow grind as Europe finally gets a handle on its flagging economic situation. Oil may recover slowly over the next 12 – 18 months as well.
Gold could rise from here, but is it enough to justify long-term investing in Newcrest Mining or the junior miners? As investors, you should stick to the lowest-cost producers with large, long-term reserves.
Newcrest is the lowest cost producer in the ASX, but isn't increasing production much from financial year 2014 levels. The gold miner is concentrating production on higher grade ore though, so it is possible for an earnings gain. Higher gold prices will add to the profit margin.
