Newcrest Mining Limited (ASX: NCM) shed more than $1 billion of its market value on Monday after the gold price suffered a sudden crash shortly after the market opened.
Gold plummeted from US$1,132 an ounce to just US$1,092 – a loss of 3.5% — as a result of heavy selling on the Shanghai Gold Exchange. As highlighted by the Fairfax press, Victor Thianpiriya, an ANZ precious metals analyst, said that five tonnes of bullion was unloaded on the Chinese market shortly after 11:30am, although the price soon rebounded to US$1,109 an ounce.
Newcrest lost a staggering 10.1% of its price while fellow gold miners EVOLUTION FPO (ASX: EVN), Northern Star Resources Ltd (ASX: NST) and Beadell Resources Ltd (ASX: BDR) lost 14.5%, 9.6% and 8.8%, respectively. The S&P/ASX All Ords Gold (Index: ^AXGD) (ASX: XGD) as a whole lost a staggering 10%.
Indeed, the gold price has been under considerable pressure in recent times and yesterday recorded its lowest level in more than five years, weighed down by three primary factors.
Why gold is falling
Firstly, the resource has historically been seen as a hedge against inflation and as a safeguard against economic uncertainty, yet it has continued to slide even despite the recent Greek and China sharemarket crises. To quote Fairfax, "Gold has failed as a safe-haven commodity despite a plethora of global economic woes."
Indications from the US Federal Reserve of a pending increase in interest rates are not helping the resource's cause. An increase in US interest rates would act to strengthen the US greenback against a basket of other currencies which would have a negative impact on the price of gold. This is because gold is quoted in US-dollars, so it becomes more expensive for international purchasers as the US dollar strengthens.
Finally, China has been one of the world's largest consumers for gold in recent years. The Asian nation updated its bullion reserves on Friday for the first time in six years which showed a smaller increase than had been anticipated. While some economists believe that provides scope for greater demand as it rebalances its reserves, Friday's heavy selloff certainly won't help the market's confidence.
What now?
After an individual stock (or in this case, an entire industry) suffers such a significant setback as it did on Monday, it can be tempting to dive in head first in the hope of a sharp rebound.
While such a rebound could eventuate; investors need to remember that predicting future movements in commodity prices with any accuracy is an impossible task. Indeed, with the US Federal Reserve looking increasingly likely to hike interest rates, and with investors becoming less concerned about the Greek debt crisis, it seems that the more likely direction for gold is down.
As a result, investors might want to reconsider a position in the sector and look for some of the market's other 'golden' opportunities instead.
