The Newcrest Mining Limited (ASX: NCM) share price has been one of the few safe havens on the ASX in the last four months. With the ASX 200 and wider global share markets having one of the most volatile periods since the Global Financial Crisis, the Newcrest price has surged 26%, from $18.69 in September 2018 to $23.50 at the time of writing, smashing through its 52-week high. Compare this to the ASX 200 index, which has fallen almost 14% in the same period.
Newcrest, along with its contemporaries Northern Star Resources Ltd (ASX: NST) and Evolution Mining Ltd (ASX: EVN), is one of the largest gold miners on the ASX. Its exposure to the price of gold can be a blessing for shareholders in times of stock market turmoil. Gold is often touted as a good hedge against stocks in times of volatility, as investors often flock to the precious metal as a safe haven. After bouncing around the US$1,200 per ounce level for much of 2018, the recent volatility has seen gold break out of this pattern and strongly rise over the last 4 months, approaching US$1,300 at the time of writing.
Newcrest is known for having a low-cost base for gold production and as costs are relatively fixed, even small rises in the gold price can increase profits exponentially. Investors know this, which explains the surging Newcrest price.
As the US Federal Reserve has been lifting interest rates throughout 2018 and looks set to continue doing so in 2019, this may provide a price ceiling on gold. However, with predictions that the US budget deficit will grow to over US$1 trillion in 2020, I suspect that gold will continue to attract investors who are increasingly worried about the American debt levels, particularly if signs emerge of a slowdown in the US economy.
However, as gold prices are typically influenced by fear more than anything else, this makes future predictions difficult.
Although gold miners can provide an effective hedge against stock market volatility and bear markets, I do not think it is a path that the average investor should tread. Gold miners are effectively leveraged bets on the price of gold, and leverage can be a double-edged sword. With a dividend yield of only 1.05%, earnings per share of 26c and a forward P/E ratio of 27.34, I will be steering clear of Newcrest for the time being.
Motley Fool contributor Sebastian Bowen has no position in any of the 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 Scott Phillips.