United States (US) sharemarkets rallied this week, while local gold shares like Newcrest Mining Limited (ASX: NCM), Evolution Mining Ltd (ASX: EVN), Northern Star Resources Ltd (ASX: NST) and Regis Resources Limited (ASX: RRL) on the ASX took a bath yesterday. This has left many potential investors asking “what’s going on?”
By Wednesday (AEST), the US Federal Reserve Bank had helped global sharemarkets climb higher by hinting that it was amenable to a potential rate cut over 2019, although its own ‘dot plot chart’ still suggests otherwise.
How does a US interest rate cut impact Aussie gold miners?
In theory, gold miners should benefit if the US Federal Reserve Bank does move to lower benchmark interest rates, as zero-yielding gold becomes more attractive to investors, compared to other risk-free or low-risk money market or debt asset classes that offer better yields when benchmark interest rates are higher.
However, the share price of Australian gold miners can move in mysterious ways, as their values are also linked to changes in the USD/AUD exchange rate. Local gold miners take nearly all their costs in Australian dollars, but sell their gold product in US dollars; therefore, if the Australian dollar rises as it did yesterday it’s a negative for local gold miners.
Complicating the picture is the argument that as the US dollar weakens demand for gold rises as it can be bought cheaper in all ex-USD currencies, making it more attractive to any government or private sector player wanting to buy it as a store of value using a foreign currency.
Finally, gold is generally considered as a ‘flight to safety’ asset, in that it represents a physical store of value. Therefore, when risky equity markets rise (as we saw yesterday), investors generally believe gold is less valuable. Whereas if the world economy and companies’ profits look set to tumble, gold becomes more attractive to huge pools of capital seeking a shelter.
So, we can see it’s tough to predict the short or long-term direction of the gold price due to the many moving parts affecting its valuation. As such, investors in the local gold miners can expect some lumpy returns.
Generally, I would not suggest trying to position a share portfolio in anticipation of a crash, as it’s not possible to know when a crash may come. If it was possible to predict then asset prices would have already reflected this reality anyway, in my opinion.
However, buying gold shares remains an option for anyone utterly convinced a crash is around the corner.
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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.