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Here’s why Newcrest Mining Limited and the gold miners got dumped today

Credit: Szaaman

If you thought the 1% decline on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) was a bad start to the week, spare a thought for the owners of ASX gold shares. The S&P/ASX All Ords Gold (Index: ^AXGD) (ASX: XGD) Index has dropped over 4% today following a broad sell off of Australian gold producers due to a sharp drop in the gold price.

Amongst the worst performers have been Resolute Mining Limited (ASX: RSG), Troy Resources Ltd (ASX: TRY), Saracen Mineral Holdings Limited (ASX: SAR), and EVOLUTION FPO (ASX: EVN). Each of these shares is down by at least 6% today, with Evolution Mining leading the way with an 11% decline.

Less impacted, but still declining more than the S&P/ASX 200 have been gold bug favourites Newcrest Mining Limited (ASX: NCM) and St Barbara Ltd (ASX: SBM). Their shares are both down around 3% in afternoon trade.

So why has the gold price dropped? Gold has dropped to its lowest level in over a month as a result of a speech by US Federal Reserve chair Janet Yellen at the Jackson Hole summit late on Friday. As detailed here, comments from Yellen have the market believing that there’s a strong chance of a US rate increase in 2016.

In fact, some economists believe there is the possibility of two rate rises before the end of the year. If this were to be the case then the most likely outcome in my opinion would be a much stronger US dollar and unfortunately a much weaker gold price.

Although the majority of Australia’s leading gold producers would still be able to run profitable operations even if the gold price suffered from a correction, the bumper profits many have been making could come to an end.

With the shares of some gold producers such as Newcrest Mining changing hands at 22x estimated FY 2017 earnings, a slowdown in earnings growth could result in many investors closing positions in a hurry. This could arguably make it an opportune time to take profits and reinvest elsewhere in the market.

But it is worth remembering that US rate rises this year are far from a certainty. Janet Yellen’s rhetoric may well be changing to a more hawkish tone, but we’ll have to wait and see on September 22 whether she does in fact take action. Until then I suspect it might be a bumpy ride for shareholders of Newcrest Mining and the rest of the gold producers.

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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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