Here’s what’s driving the spot gold price higher

Credit: Szaaman

The ASX’s gold shares were glowing again on Monday after the gold price rebounded further.

Spot gold rose just over 1% and was last seen trading for US$1,350 an ounce after trading for less than US$1,320 an ounce just under a fortnight ago.

Here’s how some of the gold miners responded today:

Indeed, gold has generated huge gains for investors so far in 2016. It posted its strongest quarterly rise in more than three decades to start the year, driven mostly by fears related to a hard landing in China and a collapsing oil price. More recently, fears sparked by Brexit saw the gold price spring higher as well.

However, it’s likely that a weaker US dollar and expectations of an extended period of loose monetary policy have also bolstered gold’s price.

A weaker US dollar makes gold more affordable to foreign countries and investors wanting to buy it, while weaker interest rates reduce the opportunity cost of holding gold.

In other words, because gold does not pay interest or a dividend (it can’t, because it’s just a rock…), demand for gold would likely fall if interest rates rose, giving investors somewhere else to generate a better return on their cash.

Of course, a higher gold price is good for the miners that produce it – particularly given the weak Australian dollar (compared to the US greenback), which helps to boost the average realised price when selling it.

However, the gold miners have enjoyed a glorious run so far in 2016. While the climb has arguably been justified, investors do need to be careful not to speculate on those shares, while they could continue to rise on the back of a rising gold price, they could just as easily retreat heavily if the gold price were to suddenly fall.

As such, given the gains already achieved from the sector this year, investors may want to focus their attention elsewhere in the market.

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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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