Why gold prices continue to climb
The coronavirus pandemic has provided a trigger for global gold prices to climb higher. In fact, gold continues to push to new record highs beyond the US$2,000 per ounce mark.
Market volatility and a bearish outlook for the global economy are what started the momentum. However, the gold mania that has taken over markets is being fuelled by a few other factors.
Central banks and governments have flushed a lot of cash into global markets. That means money supply is increasing and, in normal times, you’d expect to see inflation push higher.
Gold has historically also been a good hedge against inflation. That’s good news for investors in ASX gold shares who are hoping to protect against downside risks.
However, while there are some big pluses to holding gold right now, it’s not all good news.
Are there risks ahead for ASX gold shares?
The Newcrest Mining Limited (ASX: NCM) share price slumped 2.0% lower but is up 21.0% for the year.
It’s a similar story for Saracen Mineral Holdings Limited (ASX: SAR) with the ASX gold share climbing 77.4% to $5.89 per share.
But according to the AFR article, gold is not just a one-way bet in 2020.
For one, the article notes a drop-off in end-user demand for gold. That’s largely driven by the jewellery industry which is a heavy user of the precious metal.
Jewellery demand dropped 51% compared to the first half of 2019 according to a report from the World Gold Council.
The other factor is a fall in demand from central banks around the world. That same report noted central bank demand of 233 tonnes in the first half of 2020, down 39% on 2019 figures.
The AFR article also notes that US real yields have potentially bottomed out with little room to fall further. That means the potential attractiveness of gold as a hedge could be similarly limited.
I think ASX gold shares are delicately balanced right now. While the likes of Newcrest and Saracen have climbed higher this year, some investors are starting to think they’ve been overbought.
That’s why I think Newcrest’s full-year earnings announcement on Friday is worth watching. It will give investors a good look at what we can expect from ASX gold shares in the next 6 to 12 months.
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