It has been another day of disappointment for investors with exposure to the gold miners. Following another broad sell-off of gold shares the S&P/ASX All Ords Gold (Index: ^AXGD) (ASX: XGD) is down 2.5%.
This means the gold index has now lost over 13% of its value since the start of last week, wiping out almost all of its year-to-date gains.
The Regis Resources Limited (ASX: RRL) share price has been one of the biggest movers today, falling 5.5% to $3.05.
Not far behind with reasonably heavy declines as well are the shares of Alacer Gold Corp – CDI (ASX: AQG), Beadell Resources Ltd (ASX: BDR), Resolute Mining Limited (ASX: RSG), Northern Star Resources Ltd (ASX: NST), and St Barbara Ltd (ASX: SBM).
What’s caused the sell-off?
Although the spot gold price has held reasonably firm at US$1,226 an ounce, I believe the prospect of three U.S. rate hikes in 2017 has led many to believe the gold price has significant downside risk this year.
Overnight the probability of a rate hike at the Federal Reserve’s March 15 meeting increased to 86.4% according to CME Group. Furthermore, the probability of three rate hikes by the end of the year rose to 34.4%.
As rates rise in the United States I expect bond yields to widen, increasing the opportunity cost of holding non-yielding bullion. This is likely to put pressure on gold prices and of course the gold miners.
Should you buy the dip?
If you don’t believe that rates will rise as quickly as I expect then an investment in Resolute Mining or St Barbara could prove to be a successful one.
But if you’re like me and expect the Fed to deliver at least three rate hikes this year, the prudent thing to do would be to avoid the gold miners despite the recent dip and focus elsewhere in the market.
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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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