The Motley Fool

3 reasons the price of gold is rocketing

Shares in ASX-listed gold miners have been absolutely rocketing in 2016.

Shares in Newcrest Mining Limited (ASX: NCM) have jumped 29%, while EVOLUTION FPO (ASX: EVN) and Northern Star Resources Ltd (ASX: NST) have exploded 19% and 31% respectively since the start of the year.

The run has been driven by a sharp U-turn in gold prices which have jumped 11% since the start of the year. But why is the price of gold rising? There look to be three key reasons behind the rise so far in 2016:

1. Finding luck for Chinese New Year

Chinese Lunar New Year is synonymous with massive consumption. It’s like Christmas Eve in Australia. This is a godsend for Chinese retailers like Alibaba, but it’s also huge for gold. Gold, jewellery and red envelopes stuffed with cash symbolise gifts of good fortune for the year ahead which contributes to a seasonal rally in gold prices.

Anecdotally demand may be higher than usual this year given the gold price was near four-year lows, as this stimulates demand. Though it could also be because the year of the Monkey is considered to be particularly unlucky for those born in Monkey years, necessitating better fortunes.

Either way, the UK’s Royal Mint announced last week that it had sold out of its cool 2016 Lunar New Year one-ounce gold and silver coins which could be reflective of the demand spurred by the Chinese New Year.

2. The bottom for precious metals?

Of course, the gold price U-turn could also be a sign of a wider shift for precious metals. The price of silver has climbed 11% over the last month, while copper is up around 6%.

For copper this means bouncing off five-year lows, which is especially good news for Newcrest Mining. Copper made up 17% of Newcrest Mining’s total revenue in the 12 months to 30 June 2015 which is a significant by-product of the company’s gold operations.

3. Equities are dead! Long live gold!

Thirdly, gold’s pop could well be in response to the pressure hanging over U.S. equities like a bad case of the Mondays as the U.S. stock market falls after years of upward momentum. The uncertainty will drive investors back to gold, the price of which has been know to follow an almost inverse trend to the S&P 500 Index of the last five years.

We can get an idea of this from the below chart comparing the S&P 500 Index to the Philadelphia Gold and Silver Index which tracks about 30 U.S. gold miners.

160210 RP - Gold

Will gold’s run continue?

A seasonal rally in gold driven by Chinese New Year won’t last, but if the price of gold is being pushed upward by volatility in U.S. equities, it may have further to climb as markets continue to shudder.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of June 30th

Motley Fool contributor Regan Pearson 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. 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.

Related Articles...

Latest posts by Regan Pearson (see all)