The Motley Fool

Must Read: These 3 things are driving the gold price (and gold miners)

Investors across the gold sector have enjoyed some solid returns since the beginning of the year.

Indeed, the shiny metal started the year worth US$1,150 per ounce, down from US$1,300 around the time Donald Trump won the US Presidential election. But it has found its feet again since then: it’s currently fetching US$1,226 an ounce, with some speculating it will climb even further.

That rebound in the gold price has produced some stunning returns among Australia’s gold miners. Beadell Resources Ltd (ASX: BDR) and St Barbara Ltd (ASX: SBM) have gained nearly 30% apiece; the returns from Northern Star Resources Ltd (ASX: NST) and Newcrest Mining Limited (ASX: NCM) are both sitting comfortably in the double-digits; and Evolution Mining Ltd (ASX:EVN) has risen more than 8%.

Source: Google Finance

Source: Google Finance

Although those returns are undeniably fantastic (keeping in mind that we’re not even six weeks into the new year), it hasn’t been a smooth ride. Indeed, the miners themselves are suffering today due to a dip in the price of gold with Beadell’s shares trading almost 8% lower.

Source: Google Finance

Source: Google Finance

The first of these two charts indicates the solid returns that can potentially be made from investing in the gold miners. And indeed, if the price of gold does surge from here, one could reasonably expect the share prices of those miners to follow suit. But the second of the two charts also gives a clear indication of the risks associated with investing in the sector: even a small dip in the price of gold can cause plenty of volatility. As such, owning the gold miners’ shares is not for the faint of heart.

In case you are thinking of investing in the gold sector, it is important to understand some of the drivers behind the gold price. After all, where the gold price goes next – either up or down – could be key to whether your investment proves successful. As such, here are three things to look out for:

  1. Donald Trump. The unpredictability of the new President of the United States of America is undeniably a source of uncertainty for investors, and uncertainty and fear have traditionally played a role in driving gold prices higher. That said, his pro-growth policies would normally have a negative effect on the gold price. This tug-of-war makes it even more difficult to predict which way the price will go.
  2. Interest Rates. When interest rates rise, investors are able to generate higher risk-free returns from holding cash. By comparison, gold doesn’t pay a dividend nor does it pay interest. As such, investors often move their wealth from gold and other risky assets to cash when higher returns are on offer which can drive the gold price lower. There are strong signs that interest rates in the United States will continue to rise this year, which could have a negative impact on the gold price.
  3. US dollar. Gold is quoted in US dollars so a weak US dollar makes it cheaper for foreign buyers to purchase. As it stands, the US dollar has weakened against a basket of other currencies in recent times, which has been a key driver behind the gold price. However, higher US interest rates and solid growth (both of which could occur under Trump’s administration) would likely act to strengthen the US dollar which, again, could drag on the gold price.

There is a lot of uncertainty in the markets right now, with much of it attributable to Donald Trump’s leadership. While the gold price could continue to rise from here, I would suggest that, in the medium- to long-term, the risks do outweigh the potential benefits.

Indeed, the gold miners themselves have enjoyed a strong start to 2017. But while it may be tempting to jump on board today, I would suggest there are better alternatives for long-term investors.

If you're looking for new investment ideas today, I urge you to check out this report (it's free!) to discover one of our top investment ideas for this year. Unlike gold, this share does offer a generous dividend!

FREE Report: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is click the link below!

Simply click here to receive your copy of our brand-new FREE report, "The Motley Fool’s Top Dividend Stock for 2017."

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.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!