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Will President Trump help or hinder Australia’s gold miners?

The gold price has rebounded strongly since bottoming out in mid-December, largely thanks to a weaker US dollar. As it stands, one ounce of gold is trading for US$1,215, up around 1% since yesterday. It has also rebounded almost US$90, or 7.7%, since it fell to US$1,128 on 22 December.

Source: Goldprice.org

Source: Goldprice.org

What’s driving the gold price?

The gold price is driven by a number of demand and supply factors. While fear, uncertainty and inflation are three of the major drivers, movements in the US dollar can also impact the direction of the price of gold. This is because gold is priced in US dollars, meaning that a weaker dollar makes it cheaper for foreign buyers to purchase.

The US dollar recently hit a 14-year high against a basket of currencies, which played a significant role in driving the gold price towards its recent lows. However, the dollar has again retreated against a number of major currencies and is now trading around its lowest level in more than a month. Hence, demand for gold is again on the rise.

Investors appear to be confused with which direction the US dollar will ultimately go. Overnight, US President-elect Donald Trump said a strong US dollar is “killing us” (‘us’ being the United States), suggesting he wants the dollar to weaken against other major currencies. At the same time, however, many of the economic policies that he has proposed are very pro-growth while he is also eager for the US Federal Reserve to begin hiking interest rates — both of which should, theoretically, act to strengthen the US dollar.

What does this mean for the gold miners?

Since the beginning of the year, shares such as Beadell Resources Ltd (ASX: BDR) has gained 14.8%, Silver Lake Resources Limited. (ASX: SLR) has risen 18.8%, Northern Star Resources Ltd (ASX: NST) has lifted 10.5% and Newcrest Mining Limited (ASX: NCM) is up 8.5%. The gold miners could well rise again today following the appreciation of the gold price overnight.

Compare those gains to the mere 0.6% lift for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) and you can see that investors in the gold sector are sitting very pretty so far in 2017. If gold prices continue to rise, you could reasonably expect that trend to continue.

On the other hand, if the US dollar strengthens from its current level, you could reasonably expect the gold price to fall as well (all else being equal), likely dragging shares of many of the gold miners down with it. Investors saw this first hand in the second-half of 2016 as gold miners, which had soared in price during the first-half, suddenly plunged from their highs, some losing around half of their value.

Foolish Takeaway

Investing in the gold sector can work extremely well for investors when gold prices are rising. But it is inherently difficult, if not impossible, to know when the gold price will lift and when it will fall. It’s a risky game, and one that I would prefer to watch from the sidelines.

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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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