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What’s happening to Newcrest Mining Limited’s share price?

Credit: Mark Herpel

Newcrest Mining Limited’s (ASX: NCM) share price has crashed hard over the last month or so and is currently trading at $11.43. The share price is down nearly 28% since mid-October which compares to a mere 0.9% fall for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

Why the big fall?

Newcrest Mining is Australia’s biggest gold miner. Like others in the sector, it is highly leveraged to the spot price of gold which soared between July and October based on expectations the US Federal Reserve would prolong its first interest rate hike in nearly a decade.

Unfortunately for gold bugs, a US interest rate rise is now considered a near certainty when the Federal Reserve meets next month, putting immense pressure on the price of gold. In fact, it’s now trading near its lowest price in six-years at just US$1,069 an ounce.

There are two reasons for this. Firstly, higher interest rates boost the value of the US currency (thus making it more expensive for international buyers to purchase), while gold doesn’t offer interest payments, nor does it pay a dividend.

Indeed, gold is a rock that simply sits in a vault with the owner hoping someone will, at a later date, be willing to pay more for it than they did. When interest rates rise however, investors are given the opportunity to earn a higher return elsewhere, including from cash and from bonds, thus attracting investors away from the metal.

A weaker Australian dollar will play in Newcrest’s favour, but falling gold prices won’t. The same goes for Northern Star Resources Ltd (ASX: NST) and EVOLUTION FPO (ASX: EVN), both of which have also declined in share price over the last month or so.

Is this an opportunity?

A bet on Newcrest today really is a bet on future gold prices. Unfortunately, it is impossible to predict, with any accuracy, where the gold price will go from here, making an investment in the sector somewhat risky. Personally, I think there are better opportunities to be found elsewhere.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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