The gold price rally appears to have lost some of its steam. The shiny metal was trading for US$1,215 an ounce as of Monday but has slipped to US$1,188 in the time since, representing a decline of 2.2%.
For a bit of background, gold prices fell sharply after Donald Trump won the US presidential election in November 2016 based on the market’s expectations of strong economic growth (due to his pro-growth policies). This decline in the price of gold was aided by a strengthening US dollar, which was also a result of anticipation ahead of the enactment of Trump’s policies.
However, after it slipped below US$1,130 an ounce in December, the gold price begun charging higher. This was partially a result of the US dollar losing some of its strength, together with a potential decline in market optimism regarding Trump’s presidency. His enigmatic personality does give reason for investors to be cautious without knowing exactly what his administration could entail.
Investors who purchased gold at US$1,130 last month and sold it when it was trading at US$1,215 an ounce earlier this week would have booked themselves a considerable 7.5% gain. As a result, it’s possible that some investors are simply taking their profits off the table now, taking advantage of the market’s uncertainty.
It’s also possible that Donald Trump’s decision to go ahead with building the wall that will separate the United States from Mexico has reignited the market’s anticipation of economic growth, which would typically be expected to have a negative impact on the gold price as well.
Should you sell too?
Many investors who are bullish on the price of gold will simply buy shares of the gold miners. After all, if the gold price rises, typically the companies who produce and then sell the shiny metal are among those that will benefit. When the gold price falls, on the other hand, the opposite effect can be observed.
Here’s how some of the miners have responded today, remembering gold is down ‘just’ 2.2% since Monday:
- EVOLUTION FPO (ASX: EVN) has fallen 6.2%
- Northern Star Resources Ltd (ASX: NST) is down 7.3%
- Silver Lake Resources Limited. (ASX: SLR) is down 6.6%
- St Barbara Ltd (ASX: SBM) has shed 5.5%
- Newcrest Mining Limited (ASX: NCM) has fallen 5.2%
- Perseus Mining Limited (ASX: PRU) is down 13.5%
Thus, the question as to whether or not you should sell really depends on your level of conviction regarding which direction the gold price will go from here. If gold prices do rise, I would expect the gold miners to do so as well. But if gold prices fall from here, which they certainly could, then you may want to consider reducing your exposure to the gold sector – unless of course you enjoy experiencing those kind of stock declines highlighted above.
Successful investing is as much about avoiding potential losers as it is picking winners.
With that in mind, here are three shares I am avoiding in 2017, at least based on their current share prices. Although they could go higher from here, the risks do appear to outweigh the potential rewards.
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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.