Don’t let today’s market rally lull you into a false sense of security. We are facing multiple challenges and the volatile climate makes this an ideal time to be adding gold to your portfolio as gold stocks are being hammered.
It’s not surprising. ASX gold miners are typically out of favour as risk appetite rebounds with the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index jumping 0.4% ahead of the market close.
Gold stocks dominate the biggest losers on the ASX 200 in the last hour of trade. The Evolution Mining Ltd (ASX: EVN) share price is the second biggest laggard as it crashed 5.1% to $3.90, while the Regis Resources Limited (ASX: RRL) share price and Saracen Mineral Holdings Limited (ASX: SAR) share price took third and fourth spots with losses of 3.6% and 2.8%, respectively.
The only stock on the top 200 benchmark to perform worst is Vocus Group Ltd (ASX: VOC) but that’s because potential bidder EQT decided to call off the engagement.
Buy gold stocks on the dip
The biggest risk to global growth is arguably the US-China trade war. While many experts believe US head honcho Trump and Chinese supremo Xi Jinping will reach a truce, others like the Financial Times columnist Martin Wolfe believe the dispute could drag on for 100-years.
Investors should be adding exposure to safe haven assets and gold equities should be part of this mix. On that note, Morgans has crowned gold as its favourite commodity exposure while warning that iron ore has become a crowded trade.
“Our positive view on gold has been ‘supersized’ by the current strength in the Australian dollar gold price, which this week touched an all-time record of A$1,900/oz,” said Morgans.
“While gold stocks have already posted a strong performance in recent weeks, we see an opportunity for further upside while providing investors with a soft hedge against ongoing volatility.”
And in case you are wondering, the best gold stocks to add to your portfolio are Evolution Mining and Ramelius Resources Limited (ASX: RMS), according to the broker.
Iron ore suffering from metal fatigue
On the flipside, Morgans thinks iron ore has lost its shine. The steel making ingredient has defied the naysayers to break comfortably above US$100 a tonne in recent times and not even the escalating trade war could faze it.
Backers of Rio Tinto Limited (ASX: RIO) and BHP Group Ltd (ASX: BHP) point to the massive infrastructure building boom as governments around the world (particularly China) are using this as a way to stimulate their respective economies.
Production cuts by Brazilian iron ore heavyweight Vale S.A. are also helping to support prices, but some are questioning if the commodity has run ahead of fundamentals.
“Surging to dizzying heights in the triple digits, iron ore now sits 70% above the price we estimate is needed to encourage new supply investment,” said Morgans.
“Our concern is what happens when demand slows (as we are seeing now) and some supply comes back online (also visible now)? Longer term, robust iron ore prices also risk attracting a supply response that would become an overhang once Vale recovers its suspended production.”
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited and Rio Tinto Ltd. 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.