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Gold price crashes: Should you sell your gold shares?

Comments from the US Federal Reserve’s chair, Janet Yellen, have pushed the spot price of gold towards its lowest price in nearly six years overnight. The precious metal is now fetching just US$1,051 an ounce, down from US$1,300 an ounce in January and $1,188 in October this year.

In her most recent speech, Janet Yellen provided further indication that the Fed Reserve will hike interest rates for the first time in nearly a decade when it meets this month. She said:

“On balance, economic and financial information received since our October meeting has been consistent with our expectations of continued improvement in the labor market. And, as I have noted, continuing improvement in the labor market helps strengthen confidence that inflation will move back to our 2 percent objective over the medium term.”

She added:

Holding the federal funds rate at its current level for too long could also encourage excessive risk-taking and thus undermine financial stability.”

Indeed, interest rates in the United States have been stuck around zero percent for a number of years, forcing investors to look to international markets for superior returns. Although rates will likely remain low for some time yet, a rise in interest rates should still attract some investors back to the market, and likely away from non-yielding commodities such as gold.

At the same time, speculation of an interest rate hike is having a positive impact on the US currency (by attracting foreign investors back into the US market) and therefore making it more expensive for international investors to purchase gold (which is priced in US dollar terms), thus hurting demand.

While these movements are hurting investors who own gold, it’s also having a negative impact on the miners who produce the mineral – as they rely on higher prices to maintain strong earnings.

The share prices of miners such as Newcrest Mining Limited (ASX: NCM), Northern Star Resources Ltd (ASX: NST) and Silver Lake Resources Ltd (ASX: SLR) have come under heavy selling pressure recently, while the trio are down 0.2%, 3.8% and 6.1% today, respectively.

Of course, the mineral could soar and defy all expectations, or it could fall even further and continue to weigh on the performances of these miners. Indeed, it is impossible to predict with any accuracy where the gold price will go from here, making it risky for investors to invest in the sector today.

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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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