After a lengthy record setting run, the gold price hit a wall in March.
The yellow metal ended February trading for US$5,279 an ounce, according to data from Bloomberg. By the time the smoke cleared on 31 March, that same ounce was trading for US$4,668, down 11.2%.
As you'd expect, this put some serious pressure on ASX gold stocks, which had counted among the top performers on the S&P/ASX 200 Index (ASX: XJO) over the year to March.
Indeed, while the ASX 200 slumped 7.8% in March, the S&P/ASX All Ordinaries Gold Index (ASX: XGD) declined a painful 23.9%.
As for some of the leading ASX 200 gold stocks, Northern Star Resources Ltd (ASX: NST) shares fell 32.8% in March; Newmont Corp (ASX: NEM) shares dropped 14.5%; and Evolution Mining Ltd (ASX: EVN) dropped 23.9%.
Here's what put the gold price, and ASX gold stocks, under selling pressure.
Image source: Getty Images
Easy liquidity outweighs haven status
Noting that March was the weakest month for the gold price since June 2013, the World Gold Council (WGC) said, "Gold lost value in all major currencies, but remains up on the year."
The big sell-off followed the outbreak of the Iran war at the end of February.
While that kind of geopolitical turmoil should favour haven assets like gold, the yellow metal also is often among the first assets investors will sell when they need access to funds amid broader stock market declines.
"The 12% fall in price over the month is attributed to deleveraging and liquidity dynamics that favoured sellers, not fundamentals, which remain supportive," the WGC noted.
According to the WGC:
Gold's sell‑off during the first three weeks of March was sharp, counter‑intuitive, but not unprecedented. It occurred against a backdrop normally supportive for gold: elevated geopolitical tensions and renewed inflation concerns. The episode is a reminder that gold is not a contractual hedge.
The gold price, and ASX gold stocks like Northern Star and Newmont, also faced headwinds in March with the Iran war sending energy prices soaring the world over. This could fuel inflation and potentially increase interest rates. Gold, which pays no yield itself, tends to perform better in a low or falling rate environment.
What now for the gold price?
Looking ahead, the WGC said that some early signs of stabilisation are emerging.
Among the positive signs for a rebound in the gold price, the WGC noted that early April exchange traded fund (ETF) flows into gold have been positive across regions.
As for the Iran war's impact on interest rates in critical economies like the US, the WGC said:
Policy tightening is likely to be rhetorical (in the US) and expectations of hikes could get unwound quickly. Any energy driven CPI impulse is likely to result in demand destruction, limiting pass through to core inflation and reinforcing the case for an eventual dovish pivot.
But there are certainly risks that the gold price could face further pressure.
According to the WGC:
Should the conflict keep oil prices well in excess of US$100/bbl for an extended period – given that the somewhat muted response was reportedly due to buffers that no longer exist – this could risk further cross‑asset deleveraging, yield blow-outs, or gold mobilisation by the official sector.
Stay tuned!
