Last week, the S&P/ASX 200 Index (ASX: XJO) had a fantastic few days at the end there. The prospects of a Biden presidency together with a divided Congress helped push ASX 200 shares up by more than 4% over the week, with a 1.3% gain on Thursday and a further 0.82% on Friday. Today, this trend seems to be continuing into the new week, with the ASX 200 up another 1.68% at the time of writing to 6,294 points.
One of the sectors outperforming even these impressive gains is ASX gold miners. The ASX’s largest gold miner – Newcrest Mining Limited (ASX: NCM) was up 4.77% over last week and 3.54% on Friday alone. Today, it’s up another 0.91%. Other ASX gold miners enjoyed similar moves. Northern Star Resources Ltd (ASX: NST) was up more than 7% on Friday and up another 0.36% today. Resolute Mining Limited (ASX: RSG) is displaying similar moves, as is Gold Road Resources Ltd (ASX: GOR).
Why are ASX gold miners shining as of late, ahead even of bullish performances by the ASX 200? It’s probably got something to do with the gold price itself.
Gold shines for investors
Gold can be a strange commodity. It is accepted that gold behaves as a ‘defensive’ or ‘safe haven’ asset, often rising in times of economic or geopolitical uncertainty, and falling when investors are feeling comfortable and less ‘risk-averse’. A week ago, when the markets seemed to be pricing in a Biden landslide and a Democratic ‘blue wave’ as the most likely election result, gold was trading at US$1,882 an ounce.
Today, it is trading at US$1,957.65 an ounce. That’s a 4% increase in just one week.
And that’s probably behind the surging share prices of gold miners like Newcrest and Northern Star.
See, the economics of the mining industry means that the mining companies are ‘leveraged’ in a way to the price of the commodity they mine.
Take Newcrest Mining. In its last annual report, Newcrest told investors that it’s all-in sustaining cost (AISC) of extracting one ounce of gold form its largest mine (Cadia in NSW) was US$843. That means that when gold fetches more than this price, it represents pure profit for Newcrest. It also means that, even though gold rose 4% in value over the past week, Newcrest’s profit margins for Cadia increased from US$1,039.60 an ounce to US$1,114.65 an ounce – an increase of 7.22%.
This same phenomenon applies across all gold miners. And it’s likely for this reason that ASX gold shares are outperforming the ASX 200 today.