Newcrest Mining Limited (ASX: NCM) has been dealt a big blow today after the price of gold plummeted to a new five-year low.
Shares of Australia's gold stocks were under pressure at the market's open this morning after spot gold fell 1% on Friday to trade at US$1,134.47 an ounce – a price which hasn't been seen since 2010. According to the Fairfax press however, gold has nosedived further during today's session, plummeting 4% to US$1,086.18 in what it describes as being 'akin to a flash crash'.
There are a number of reasons which could explain the commodity's weakness recently, including:
- Strong US dollar. With the US Federal Reserve indicating that it will increase interest rates – possibly as early as September – demand for the US dollar is on the rise. A stronger US dollar is generally seen as a negative for gold prices given that the resource is quoted in US dollars (i.e. a stronger US dollar makes it more expensive to purchase internationally).
- China. The fall could also be attributed to lower-than-expected purchases from China which, together with India, has been one of the world's fastest growing markets for gold jewellery in recent years.
- Safe haven. Gold is generally considered to be a hedge against inflation and has traditionally been targeted by investors during times of economic uncertainty. With the market growing more comfortable with the situations unfolding in Greece and China (i.e. the Asian nation's recent sharemarket meltdown), that interest seems to have subsided.
Australia's gold miners have been crushed as a result with the S&P/ASX All Ords Gold (Index: ^AXGD) (ASX: XGD) crashing 8.8%, compared to a 0.1% decline for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
Newcrest Mining, the nation's largest gold miner, was slammed 8.3% to trade at just $12.10 while EVOLUTION FPO (ASX: EVN) and Northern Star Resources Ltd (ASX: NST) have been hit even harder, losing 15% and 9.2% respectively.
Meanwhile, St Barbara Ltd (ASX: SBM) has been slammed 7.8% and Regis Resources Limited (ASX: RRL), Resolute Mining Limited (ASX: RSG) and Beadell Resources Ltd (ASX: BDR) are down 7.9%, 10.2% and 8.8%, respectively.
Predicting future gold prices with any accuracy is an impossible task so investors thinking about buying into the sector today might want to think twice beforehand and acknowledge the huge risks in doing so.
