After a stellar start to the year the Newcrest Mining Limited (ASX: NCM) share price has given back a lot of its gains in recent weeks as the case for rate hikes in the United States strengthened.
Tonight the U.S. Federal Reserve will meet to discuss whether to raise rates this week. The current probability of a rate hike to between 75 and 100 basis points at this meeting stands at 93% according to CME Group.
I expect Janet Yellen and the Federal Reserve will raise rates this week, setting up at least three U.S. rate rises this year.
Gold is highly sensitive to rising interest rates as it increases the opportunity cost of holding the non-yielding metal, while also boosting the U.S. dollar, which it is priced in.
As a result I wouldn’t be at all surprised to see the gold price drop towards the US$1,000 an ounce mark by 2018. Currently the spot gold price is fetching US$1,200 an ounce.
Whilst at this level Newcrest and many other of Australia’s leading gold miners will still have profitable operations, my main concern is that the bumper profit growth they have delivered in recent months will come to an end.
This could potentially lead to a significant drop in their respective share prices, especially considering their incredible rally over the last 12 months.
Because of this I would suggest that investors look elsewhere in the market. There are a number of sectors like healthcare and information technology which have some high quality companies trading at fair prices. With rates on the rise, I would pick those ahead of every gold miner today.
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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