After a sensational start to the year the Newcrest Mining Limited (ASX: NCM) share price has certainly hit a rough patch. Since Friday its shares have fallen 7.5%, wiping out around half of its year-to-date gains.
But it hasn’t just been Newcrest Mining. Fellow gold miners St Barbara Ltd (ASX: SBM), Northern Star Resources Ltd (ASX: NST), and Resolute Mining Limited (ASX: RSG) have all fallen heavily, dragging the S&P/ASX All Ords Gold (Index: ^AXGD) (ASX: XGD) down a remarkable 8.5% since Friday.
Although the gold price has held reasonably firm at US$1,249 an ounce, the prospect of a U.S. rate hike in March appears to have put a stop to its recent rally.
According to CME Group, the probability of a rate hike in the United States at the Federal Reserve’s March meeting has risen from 35.4% to 66.4%.
I believe a rate rise in March could put the Fed on course to raise interest rates between three to four times in 2017. If this happens then I expect bond and fixed income investments will become attractive, whereas yield-less gold is likely to lose its appeal.
Overall, I believe this has the potential to send the gold price back down towards the US$1,000 mark in 2018.
Should you avoid Newcrest?
With an all-in sustaining cost of US$770 an ounce, Newcrest would still remain profitable if the gold price fell as sharply as I expect it could.
But its lower levels of profitability may not justify the premium its shares trade at today. So for this reason I would suggest investors avoid Newcrest and the rest of the gold miners this year.
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Returns as of 6th October 2020
Motley Fool contributor James Mickleboro 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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