Here’s why Newcrest Mining Limited is getting slammed today

Last night news came out of the United States stating that the Federal Reserve is likely to raise interest rates in June if economic data points to stronger second-quarter growth and firming inflation and employment.

This was according to minutes from the central bank’s April policy meeting, and was the last thing that shareholders of Newcrest Mining Limited (ASX: NCM) will have wanted to wake up to.

Newcrest Mining’s shares opened 4.7% lower than yesterday’s close, and have now declined by 6.5%. The reason for this is the effect these minutes had on the price of gold today and and its future prospects.

A good number of economists had ruled out US rate rises for the rest of the year, and few dared to suggest there was a possibility of one coming in June. But as the minutes show, it is a real possibility now.

The US dollar is the ultimate safe haven for investors. But with interest rates at extreme lows it was increasingly unattractive and many turned to gold. This helped gold prices climb 25% in just five months, much to the delight of gold miners. But if rates start to look like they are going to rise gradually, I would expect to see funds start to pour out of gold and into the US dollar.

At the start of the week Canada’s BMO Capital predicted gold was heading to US$1,400. But unfortunately for Newcrest Mining the Fed’s latest thinking could now mean the brakes slam down on the price of gold’s rapid ascent.

Newcrest Mining shareholders are of course not the only ones seeing large declines today. Fellow miners AngloGold Ashanti Limited (CHESS) (ASX: AGG), Independence Group NL (ASX: IGO), OceanaGold Corporation (ASX: OGC), and St Barbara Ltd (ASX: SBM) are all nursing declines of a similar magnitude.

Australian gold miners are regarded as being the best in class with an average all-in sustaining cost of $US833 per ounce, so a drop in the gold price shouldn’t stop them from running profitable operations. However, the shares of these miners were changing hands on extremely high multiples in anticipation of bumper earnings growth.

Newcrest Mining, for example, has been trading at 53x estimated FY 2016 earnings. At this level it comes as little surprise to see the share price get chopped down when its future earnings growth is called into question.

Although a rate rise in June is not a certainty and the gold miners could bounce back from these declines, I believe an investment in these gold miners is a high risk one which I personally would avoid.

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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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