Why the Brexit risk could boost ASX gold miners

Credit: Szaaman

What a year it has been so far for the price of gold. At the turn of the year it was trading at US$1,061 per troy ounce, but at the time of writing it sits at US$1,230.

This rise of 16% has been great news for gold producers on the ASX such as Newcrest Mining Limited (ASX: NCM) and Northern Star Resources Ltd (ASX: NST). The rise has been the catalyst to send their share prices rocketing up this year by 38% and 27%, respectively.

Even the smaller producers have been getting in on the action. Ramelius Resources Limited (ASX: RMS), Troy Resources Ltd (ASX: TRY), and Dacian Gold Ltd (ASX: DCN) have all produced mind-blowing returns for shareholders.

In fact, Ramelius Resources is the laggard of the three by only managing to produce a share price gain of 102% so far in 2016!

Well the good news for shareholders of these five companies is that a growing number of people believe that the price of gold could be set to climb to US$1,400 in the next few months.

Star money manager Jeffrey Gundlach reiterated his view that gold will reach this level in a recent webcast. Gundlach has a good record with predictions like these. Last year he predicted that oil prices would plunge, junk bonds would live up to their name, and emerging markets would suffer from China’s slowing economy.

He believes gold prices are likely to climb higher as investors lose faith in central banks and the stock market recovery falters.

It is hard to disagree with this view with negative interest rates spreading around the world and events like Britain’s vote to leave or remain in the European Union just a couple of months away.

Last year when Greece was voting on its own exit from the EU, the markets were incredibly volatile. Economists at the time suggested that if Greece voted to exit then the price of gold would rise from a similar level all the way up to US$2,000.

Whether that would have been the case or not, we will never know. But if Britain does exit the EU, I feel it is fair to presume that there will be a lot of volatility in financial markets which often causes a flight to safety. This would undoubtedly create a lot of buying pressure on gold, driving the price higher.

Although all the gold producers would be likely to climb higher if the gold price rises, Newcrest Mining would be my pick of the gold producers today. In its most recent report it had a group all-in sustaining cost of US$757 per ounce. Which means that if gold did climb to US$1,400, then there will be bumper profits again for the company.

But gold won’t stay at high levels for ever, and nor will the share prices of gold producers. These type of shares are not ones you can buy and hold forever, they will require babysitting.

So if that doesn’t work for you, then these three blue chip shares are probably better options. They are stable shares that pay strong dividends and could be about to see their share prices soar.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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