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Are ASX gold shares like Newcrest overbought right now?

Are ASX gold shares oversold? According to an article in the Australian Financial Review (AFR), there could be more risk than investors are currently pricing in.

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.

Foolish takeaway

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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Motley Fool contributor Ken Hall 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.

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