Gold has experienced an unbelievable run so far this year.
In what was its best quarter in more than three decades, according to Bloomberg, the commodity soared to around US$1,294 an ounce, up from a six-year low of just US$1,050 an ounce in December.
As you'd expect, the rallying gold price has proven very beneficial for Australia's gold miners as well, which has seen shares across the sector skyrocket.
Newcrest Mining Limited (ASX: NCM) and EVOLUTION FPO (ASX: EVN), for instance, have risen 46% and 54% since the beginning of the year, respectively.
St Barbara Ltd (ASX: SBM) and Northern Star Resources Ltd (ASX: NST) have performed even better, lifting 77% and 63%, while Beadell Resources Ltd (ASX: BDR) and Silver Lake Resources Limited. (ASX: SLR) have soared 96% and 154%, respectively. Not bad considering we're less than five months into the year.
Indeed, investors in the sector should be very pleased with those gains, and many of the other investors who remain on the sidelines will no doubt be tempted to get in on the action.
But it is by no means a risk-free venture. In fact, the gold price has already recorded a sharp decline since it reached that US$1,294 high, with the metal now fetching US$1,227 an ounce. Also, it could be headed even lower.
To begin with, gold is considered to be something of a 'safe haven' for investors around the world, meaning its price has a tendency to rise alongside fear and uncertainty. There was plenty of that driving its price higher at the beginning of 2016, although fear and volatility do come and go from the market. As Warren Buffett once said (my emphasis):
"Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn't produce anything."
The other factor that is worth considering is that the US dollar fell sharply at the beginning of the year due to lowered expectations of interest rate hikes in that country in 2016. Well, there are now signs that suggest an interest rate hike in the United States could happen sooner rather than later, which is pushing the US dollar higher again.
As gold is priced in US dollars, it benefits from a weak currency as it makes it cheaper for other countries to consume. As the US dollar rises, however, that could have an equally negative effect on the price of gold.
Of course, it's impossible to tell with any accuracy where the gold price will go from here. If it does fall, however, some of those shares that have generated huge gains so far this year could soon reverse course. As such, investors should take time to reassess their exposure to the sector, and the risks they are willing to expose their wealth to.
