If you’re investing in ASX gold shares, then we hope you’re aware of how they’re leveraged to the price of gold.
By that we mean that gold miners’ costs for pulling an ounce of the yellow metal out of the ground are fairly fixed. So, any change in the price of gold goes straight to the bottom line.
For a simplified example, if it costs an ASX gold share $800 to mine one ounce, and gold is selling for $1,000 per ounce, the company is booking a profit of $200 per ounce. Now if our hypothetical gold price increases by 20% to $1,200, the gold miner’s profit leaps to $400 per ounce, up 100%, or five times more than the gold price climbed.
The same is true in reverse, should gold prices fall.
What can we expect from the gold price?
Gold prices (briefly) reached multi-year highs of US$2,050 per ounce on 8 March. Since then, the yellow metal has retraced to the current US$1,830 per ounce, which is still high by historic levels.
Some gold proponents believe the bullion will rocket to new records as inflation soars and investors seek a haven asset amid rising geopolitical tensions.
Tom Palmer, CEO of Newmont Mining Corp (NYSE: NEM), the world’s top gold producer, isn’t among them.
As reported by Bloomberg, Palmer believes gold prices will remain near the current levels, or move up slightly as inflation and global uncertainties remain in play.
However, Palmer does see the lower end of the gold price, the support price, increasing from some US$1,200 to the US$1,500 to US$1,600 range.
That higher support price would certainly be welcomed by investors in ASX gold shares.
“I see no reason why you wouldn’t, over the next year or two, see it around current levels. But more importantly sitting on top of a floor that has fundamentally moved given the events of the last couple of years,” he said.
As for Bitcoin (CRYPTO: BTC) serving as digital gold, Palmer added, “I focus on gold being a store of wealth for millennia in a transparent and highly regulated market. Gold is a different investment decision than crypto.”
How have these three ASX gold shares been performing?
With gold prices having retreated back to their early January levels, ASX gold shares have given back the sizeable year-to-date gains they were sitting on in mid-April.
Since the opening bell on 4 January, the S&P/ASX All Ordinaries Gold Index (ASX: XGD) is down 8%.
The Newcrest Mining Ltd (ASX: NCM) share price has fared better, down 3%.
For some broader context, the S&P/ASX 200 Index (ASX: XJO) has dropped 13% in 2022.