Stagflation and gold: Could it be an ideal match for ASX 200 gold miners?

Gold prices continue sideways while mining shares are trading in the red.

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Key points

  • ASX 200 gold miners have struggled this year to date 
  • The gold price has also wobbled in recent months, despite rising inflation 
  • There's talk of stagflation, and that could potentially benefit some ASX 200 gold miners

The gold price has wobbled lately having danced around the US$1,800/ounce mark since 9 May. At the time of writing, the yellow metal is priced at US$1,837 per troy ounce.

Meanwhile, according to the Reserve Bank of Australia (RBA), inflation in Australia was 5.1% in the March quarter, “which is the highest rate in many years”.

Among economist circles, there’s been chatter of a potential threat to growth called stagflation.

This is where we have stagnating economic growth/GDP mixed in with rising inflation. Normally, it’s one or the other. So a blend of the two is a threat to productivity and buying power.

Is Australia at risk?

Australia’s economy appears to be within an inflationary cycle, according to the RBA:

When the RBA published its latest set of forecasts in early May, we expected that inflation would peak at around 6% at the end of this year.

The information available since then has led us to push this forecast peak higher. Since early May, petrol prices have risen further due to global developments and the outlooks for retail electricity and gas prices have been revised higher due to pressures on capacity in that sector.

As a result, we are now expecting inflation to peak at around 7% in the December quarter.

Despite the outlook, economic growth forecasts appear robust and in line with longer-term averages.

The RBA also says GDP is forecast to grow by 4.5% over 2022, and by 2% in 2023. RBA data shows this is roughly the average level of growth seen per year from 2014–2018.

What does this mean for ASX 200 gold miners?

The price of gold has held steady in 2022 while equity markets try to regain footing after their sudden fall.

If stagflation were to creep in as an economic issue, historical data shows this could be bullish for gold.

“Of the four business cycle phases since 1973, stagflation is the one that is most supportive for gold and conversely the worst for risk assets,” World Gold Council analysts Johan Palmberg and Krishan Gopaul wrote in March.

Goldman Sachs head of Commodities research, Jeffery Currie also said the “perfect storm” of demand and geopolitical uncertainty could push gold to US$2,500/ounce.

Speaking to Livewire Markets, Perth Mint’s Jordan Eliseo said: “The outlook remains healthy, with several factors suggesting that rather than repeat the post-2011 experience, the bull market in gold will continue.”

He said that gold looks to be in a “far healthier” position than it was in its last bull run in 2011, and that it remains underbought compared to then as well.

“[T]he yield environment, valuations in financial markets, and inflationary dynamics are all more supportive for the precious metal today,” he added.

“Combined, these factors suggest gold’s bull market run could well continue.”

Should the gold price rally once more it would certainly be good news for ASX 200 miners such as Evolution Mining Ltd (ASX: EVN), Northern Star Resources Ltd (ASX: NST) and Newcrest Mining Ltd (ASX: NCM).

The shares are each down 17%, 16% and 5% this year to date respectively, whilst the energy portion of the ASX 200 commodity basket has soared into the green.

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Motley Fool contributor Zach Bristow has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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