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Why these 2 ASX gold stocks shot up this morning

Many of Australia’s gold stocks rose sharply when the ASX opened this morning. The Newcrest Mining Ltd (ASX: NCM) share price flew out of the gates, up 2.14% in early trade, and Northern Star Resources Ltd (ASX: NST) shares opened up 1.32%.

Gold has long been viewed as a safe haven in times of uncertainty or chaos. Typically, the gold price rises when volatility does, or when faith in markets or economic institutions is shaken.

Geopolitical tensions have seen the gold price rise this year, with the yellow metal trading for US$1,493.21 per ounce at the time of writing, or $2,173.27 here in Australia.

Chaos and conflict driving the gold price

It’s not hard to see why gold is on the rise, as Britain’s on-again, off-again plans for Brexit threaten to topple yet another of their Prime Ministers, and the US and China exchange blows in a trade war that is sparking economic chaos for both countries and the wider world.

Meanwhile, US investment bank JP Morgan has recently launched a ‘Volfefe’ index, named for volatility and Trump’s notorious late-night Twitter typo ‘covfefe’. JP Morgan’s new index is designed to track the effect that Trump’s often bizarre Twitter activity has on US Treasury yields. According to JP Morgan, there is a strong and growing correlation between volatility in Treasury yields, and Trump’s attacks on the Federal Reserve, the media, his political opponents, international trade partners, and members of his own government.

Whatever your opinion of the brash US president, you can’t avoid the unpredictable effects of his often-bizarre outbursts. All of which is bad for stocks and bond investors, but should continue to be good for gold.

Low interest rates, meanwhile, can also be a driver of the gold price. Sustained low interest rates in much of the world have been good for gold, and with Trump angrily demanding that the US Fed cut rates further, this looks likely to continue.

Buying gold stocks to magnify your gains

Of course, you can try to benefit from this chaos by investing directly into gold. This can come with challenges and costs of its own, as you need to safely store physical gold yourself, or rent space in a facility to store it for you. You can find various exchange traded funds or other instruments that attempt to mirror the gold price, though often these don’t do so perfectly, and can come with their own risks.

A popular option is to focus instead on gold producing stocks, which obviously can be expected to benefit from a rising gold price. Because of this, ASX gold stocks like Newcrest or Northern Star Resources can rise during times of volatility, while most other stocks are falling. In fact, gold stocks usually magnify changes in the gold price, rising three or four percentage points when gold rises only one or two.

Be warned though, those magnified changes work both ways! Falling gold prices, whether caused by rising interest rates, increasing geopolitical stability or a flood of supply, will see gold stocks falling as quickly as they rose.

Both Newcrest and Northern Star have pulled back somewhat from this morning’s early rises, but if global volatility continues to drive gold price rises this year, both could benefit.

Northern Star and Newcrest are relatively stable and established, for gold stocks, with Northern Star reporting Earnings before interest, tax, depreciation and amortization up 8% in its recent FY19 financial results, and a strategy of growth through acquisitions. Newcrest reported a strong financial position, with a 22% increase in underlying profit and a similar strategy of disciplined acquisitions as the gold price rises.

If this year’s unpredictable events continue to stress markets, these two Australian gold stocks could be perfectly positioned to see magnified gains from a rising gold price.

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Motley Fool contributor Tyler Jefferson 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.