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%.
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.
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:
- 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.
- 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.
- 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.
