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Why the gold miners have rocketed higher today

Although the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has started the week poorly, it is a very different story for the S&P/ASX All Ords Gold (Index: ^AXGD) (ASX: XGD).

The Australian gold miner index is up over 5% in morning trade thanks to a slight rebound in the gold price. At the time of writing the spot gold price is fetching US$1,206 an ounce, up almost 1% from its low on Friday.

Although this isn’t necessarily a huge rebound, it hasn’t stopped the St Barbara Ltd (ASX: SBM) share price, the Resolute Mining Limited (ASX: RSG) share price, the Perseus Mining Limited (ASX: PRU) share price, and the Beadell Resources Ltd (ASX: BDR) share price from climbing around 7% each today.

Mining giants Newcrest Mining Limited (ASX: NCM) and Evolution Mining Ltd (ASX: EVN) shares aren’t far behind either with similarly solid gains.

Why have the gold miners rallied so strongly?

Today’s rally appears to be related to key job data out of the United States on Friday. Although that data supported the case for a rate hike this week by the Federal Reserve, it was actually a touch weaker than many had expected.

According to the Financial Times the slower wage growth data that accompanied the non-farm payroll release argued against an aggressive Fed hand. This led the U.S. dollar to weaken slightly and the gold price to rebound.

But I wouldn’t get too excited if I were a shareholder of one of the gold miners. Up until last week few in the market believed a March rate hike was a possibility. But now it is being priced in as a near certainty.

The probability of three rate hikes this year may be 35.7% according to CME Group, but I certainly wouldn’t bet against it.

If President Trump follows through on his infrastructure plans I expect inflation will rise significantly, meaning the Fed has no choice to lift rates. As rates rise I believe gold will become less attractive to investors and I expect to see its price fall sharply.

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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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