Is now the time to bet big on the gold miners?

There isn’t as much light shining from the gold sector today, but it’s little wonder considering the massive gains posted by some of the companies in the sector on Monday.

As Bruce Jackson, General Manager of The Motley Fool Australia, noted:

The old saying goes there’s always a bull market somewhere.

Well yesterday, it was well and truly in gold stocks, the All Ordinaries Gold sub-index soaring around 12%, its biggest percentage gain in close to three years.”

These were just some of the highlights from the sector for the day…

The gains didn’t stop there, with Silver Lake Resources Limited. (ASX: SLR) and Regis Resources Limited (ASX: RRL) also posting strong returns for the day.

By now, you’re probably aware that the gold sector enjoyed a remarkable start to 2016. It experienced its strongest quarter in more than three decades, but soon lost its appeal based on expectations the US Federal Reserve would hike interest rates.

After all, gold doesn’t yield anything, so when interest rates rise investors typically sell the metal in favour of higher-yielding assets.

A rate hike was expected this month, but those expectations have now diminished as a result of weak jobs data from the United States. As a result, the gold bulls are back in town and they’re spending up on the miners themselves.

But while there might be a lure to gold right now, investors need to be careful.

Indeed, it’s an industry that offers potential for significant gains when the gold price is rising, as it has done this year. But when things turn south, investors can be hit hard.

And that, of course, is the problem with investing in the gold sector, or the mining sector as a whole. It’s impossible to know with any certainty where commodity prices will trade in the future, so an investment in the sector is as much a bet on the direction of a commodity as it is an investment in the underlying business.

It’s a risky play, particularly given the enormous returns that have already been posted by companies across the sector.

Of course, some investors will argue that the time is still right, ­and it could be. But timing the market is a mug’s game, and they would be wise to focus on strong businesses that have the potential to be much larger in five or ten years’ time, instead.

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Motley Fool contributor Ryan Newman 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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