What happened to the AGG share price?
Anglogold Ashanti Ltd [ASX:AGG] picked up additional gains today while the broader Aussie market drifted lower. AGG has been one of the best performing stocks this year, and there’s a perfect explanation for why that is.
Why did AGG shares do this?
For any investor that understands how gold prices work, the ‘surprise’ rally of AGG in 2016 may not be all that unexpected. There are three things about gold that I want to remind investors about the current market environment.
One is that the gold price reflects the pricing of the broad commodity basket over time. This is due to both inflationary effects of commodities, and gold’s ability to hedge against inflation. If commodity prices go down, gold follows suit.
The second point relates to gold’s ability to rally during market crises. This happened during the Global Financial Crisis, and it’s happening again now. The third point is on trading; the simplest trading strategy for gold is to trade the long term momentum of its price.
What now for AGG?
I believe the current rally is due to the second point I mentioned above — investors are running towards gold to avoid the volatility in the current marketplace. However, gold isn’t ‘shining’ because of fundamental demand or a structural recovery in commodity prices. Nor is it rallying due to rampant inflation — we are hardly getting any inflation. Gold is rallying solely due to its ‘safe-haven’ status. But that won’t last…
I don’t see a structural recovery in commodity prices anytime soon. We still have overcapacity not only in main energies, but in other types of commodities too. China is still soft. Gold demand is stable but does not support a rally of this magnitude.
Gold is going to pull back when the current market calms down. If you are an active trader, your best bet may be to take some profits off the table. For the consistent traders out there, a short position is still adequate for gold.
Emerging Market Analyst, New Frontier Investor