Gold shares jump as volatility returns

Jitters across global equity markets overnight have kept the fires burning under the spot gold price.

After rising 1.5% the previous day, the spot gold price has gained another 0.7% to US$1,281.55 an ounce, and on course for its second-weekly gain.

European stock markets rose and then crashed after European Central Bank (ECB) president Mario ‘whatever it takes’ Draghi announced a range of measures designed to kickstart growth, including lowering its main deposit rate from -0.3% to -0.4% (yes, negative interest rates on deposits), cutting its main refinance rate from virtually nothing (0.05%) to nothing (0.0%) and bulking up monthly asset purchases by another €20 billion to €80 billion.

While that all appears to be good news, later at a press conference, Mr Draghi said future cuts would be unlikely and only under extreme circumstances, panicking investors who had been expecting more cuts down the track.

ANZ Research noted that gold rallied after that comment, suggesting the ECB has reached the ‘end of the line’ and if these measures don’t work, it’s up to the markets to work through it.

As a result of the gold price gains, several ASX-listed gold miners have seen their share prices jump today. Resolute Mining Limited (ASX: RSG) and Perseus Mining Limited (ASX: PRU) share prices have both jumped by more than 10%. Ramelius Resources Limited (ASX: RMS) is up 8.9%, Silver Lake Resources Limited (ASX: SLR) has gained 7.9%, Beadell Resources Ltd (ASX: BDR) is up 7.8% and even Newcrest Mining Limited (ASX: NCM) and Northern Star Resources Ltd (ASX: NST) are up – 3.3% and 3.4% respectively.

That has driven the S&P/ASX All Ords Gold (Indexasx: XGD) (ASX: XGD) up 3.5%, with the index up more than 60% in the past six months on the back of the rising gold price.

The one minor issue for the Australian-based gold miners is that the Australian dollar has rapidly moved upwards against the US dollar, now buying nearly US 75 cents. A few weeks ago, it was at 71 US cents. Many of the miners mentioned above should produce excellent results when they report later this year, thanks to the differential between the gold price in Australian dollars – at A$1,714 an ounce – and their all in sustaining costs of around A$1,000 to A$1,100 an ounce on average.

Foolish takeaway

Shareholders may see the share prices soar, but we’ll have to wait and see how many of the gold miners actually pay out dividends, rather than plug their new-found profits into digging more holes.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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.

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