Gold plunges below US$1,200 and it could get worse

In a surprise twist of fates, share markets around the world have soared in response to Donald Trump’s election victory while the gold price has plummeted. It was expected to be the other way around!

In the lead-up to the election, it was thought that a Trump victory would cause so much uncertainty that shares would crash, at least for a short while. It was also thought that same uncertainty would put a rocket under the price of gold, which is typically seen as a safe-haven during times of fear.

Indeed, as The ABC reported two days out from the election earlier this month, some analysts were putting a US$200 premium on the shiny metal if Donald Trump were to become president. To put it somewhere around the US$1,500 an ounce mark.

Although it did jump initially, the metal has since crashed in price. In fact, overnight it fell almost 2% to below US$1,200 an ounce. It’s sitting at US$1,185 an ounce at the time of writing – its lowest price since February.

What happened to gold?

Trump’s victory has sparked speculation of solid growth in the economy due to his pledge to reduce the corporate tax rate and invest heavily in infrastructure. In turn, the US economy looks to have continued its recovery with the market pricing in a rise in interest rates in that country next month.

The prospect of higher fixed interest returns has seen plenty of cash return to the United States with Yahoo! reporting that the US dollar has surged to a more than 13-year peak on Wednesday. A rising dollar makes gold more expensive for international buyers, making it a less attractive investment.  What’s more, given that gold doesn’t pay interest or a dividend, investors are likely reassessing their positions in the metal to back assets offering potentially higher returns.

Should you buy the stocks?

Gold shares were the shining light for the ASX earlier in the year as the precious metal enjoyed one of its strongest rallies in decades. St Barbara Ltd (ASX: SBM), EVOLUTION FPO (ASX: EVN) and Newcrest Mining Limited (ASX: NCM) were all among the market’s top performing shares for 2016 at that time – sporting gains of at least 80% – with many assuming they could continue to rise.

Since that time, however, those three shares have fallen 26.2%, 27.6%% and 14.6%, respectively, with many others enduring heavy losses as well. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has shed 1% in the same time.

Indeed, here is how some of the gold shares are performing today alone:

  • St Barbara is down 5%
  • Evolution Mining has fallen 5.1%
  • Newcrest Mining has shed 3.3%
  • Northern Star Resources Ltd (ASX: NST) retreated 4.2%
  • Beadell Resources Ltd (ASX: BDR) has lost 6.7%
  • Silver Lake Resources Limited. (ASX: SLR) has fallen 6.2%

Seeing those declines should act as a stark reminder to investors why investing in the gold (or resources sector as a whole, for that matter) is risky. While there will always be pundits speculating on the direction the price of a commodity or resource will go, it is inherently difficult to do with any consistency.

If prices rise, chances are you’ll do okay. But buyer beware, if they fall.

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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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