Motley Fool Australia

Expert warns that record-breaking gold price is facing painful correction

Bear market

ASX gold stocks continue their golden run as the precious metal holds around record highs and looks poised to push even higher.

But the analysts at Macquarie Group Ltd (ASX:MQG) is warning that gold is running ahead of fundamentals, and the higher it runs, the harder it will fall.

This could see the strong price gains made by S&P/ASX 200 Index (Index:^AXJO) gold miners come undone.

The Evolution Mining Ltd (ASX: EVN) share price surged 61% since the start of the year, while the St Barbara Ltd (ASX: SBM) share price and Newcrest Mining Limited (ASX: NCM) share price have jumped 33% and 22%, respectively.

It’s deflation, not inflation lifting gold

“Gold has finally pushed through the $2k psychological target, at a high of [US]$2,030/oz at time of writing,” said Macquarie.

“The move continues to benefit from USD weakness and the ongoing slide in US real rates through -1%.”

I noted some media commentary about how low inflation is a negative for the gold price. But I believe this misses the point. Gold isn’t running to record highs due to expectations of runaway inflation.

If anything, no one is expecting much inflation over the next few years, and this was evident even before the COVID-19 pandemic.

Gold bulls are drawing their latest breath from expectations of deflation or dis-inflation, as highlighted by Macquarie’s comment on “real rates”.

Gold overshot on the upside?

Don’t get me wrong, history shows how effective gold is as an inflation hedge. But the 3,000-year-old store of value is also a relatively good way to protect against falling real asset prices.

“Even with these supportive factors, however, gold continues to look rich on a cross-asset basis, trading [US]$150-$200 above our ‘fair value’ estimates,” explained Macquarie.

“We believe this is the overshoot move that we have been looking for and, while momentum could carry prices further, it raises the risk of a sharp correction.”

Is it time to sell ASX gold miners?

I don’t share this bearish view, but I do believe what goes up will come down when it comes to commodity prices. And the faster something rises, the harder it is likely to fall when the day of reckoning comes. I just don’t think this will happen in the next year or two.

But if you want a foot in both camps, Macquarie suggested investors dump the large cap gold producers and buy their smaller counterparts.

Some of the gold miners that the broker has an “outperform” (or buy) rating on include the Resolute Mining Limited (ASX: RSG) share price, Silver Lake Resources Limited. (ASX: SLR) share price and OceanaGold Corp (ASX: OGC) share price.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Motley Fool contributor Brendon Lau owns shares of Evolution Mining Limited and Newcrest Mining Limited. Connect with me on Twitter @brenlau.

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.

Related Articles…