Are gold stocks set to keep climbing higher?

Gold miners may be in for an extended rally. But will any quick gains just as easily disappear?

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In a previous article I wrote about how gold was rallying partly because the European Central Bank (ECB) was about to start quantitative easing (QE).

From this QE the Euro could weaken against major currencies and even reach parity with the US dollar – something which hasn’t been seen since 2002. Traders and big investors may be seeking refuge in gold, pushing up the spot price to just over US$1,300 an ounce.

It’s been five months since that price was seen and no one is more thrilled than the gold miners.

   Gold 6-month Spot Price chart 

gold spot price chart

Source: cnbc.com

The ASX’s biggest gold miner Newcrest Mining Limited (ASX: NCM) jumped about 4% on Wednesday. Similarly, Beadell Resources Ltd (ASX: BDR) rose 4.2%, Northern Star Resources Ltd (ASX: NST) shot up almost 7% and Regis Resources Limited (ASX: RRL) gained 2% in afternoon trading.

Europe hasn’t recovered as well after the GFC as the US and UK. One reason is that although Europe has a common currency, it has at least 17 separate finance ministers representing their own country. That makes for fuddled finance. Now the ECB must enact this new QE to pump-up the economies of the European Community.

This also adds to the ongoing talk about the potential collapse of the Euro, which could fan market anxiety further and give gold more momentum.

Regularly, gold is seen as a hedge against inflation, but it also acts as a refuge against market uncertainty. That was a main driver for gold going all the way up to US$1,920 an ounce in September 2011- the market’s fears of financial collapse in Europe.

Could gold rally even higher now? No one can really say at this point. As for buying gold miners, they can rise quickly when gold rises just a little because of speculation. As precious as gold may be, you still have to stick with only the lowest cost producers. Newcrest Mining would probably be the first choice among the gold miners. Large resources and low cost production add up to potentially bigger earnings if gold can keep on rising.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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