Should You Buy Newcrest Mining Limited at This Price?

What happened to the NCM share price?

Newcrest Mining Limited [ASX:NCM] opened 4.7% lower over yesterday’s close. This was an overnight risk that could not have been avoided by those with a position in the stock. However, there is no shame in booking this sudden loss.

NCM has been a solid momentum stock in the past few months, similar to other Aussie gold producers. However, many investors are asking themselves whether gold is facing a major correction?

Why did NCM shares do this?

When it comes to gold miners, Newcrest is something of a favourite among investors. With a cash cost well-below the current price of gold, Australian miners have been running profitable businesses.

Many cite high forward multiples as a sign of a potential correction; I must remind readers that high forward multiples are not a justification for a correction. You can always say high-multiple stocks are at risk of a pullback, despite the fact that they can continue to outperform for a longer time.

Obviously, the pullback in gold overnight was caused by the newly-released Fed minutes. The Federal Reserve signalled that an improving US economy might result in a rate hike as early as June. Higher rates would push the US dollar higher, while lowering commodity prices; this generated a knee-jerk reaction in the markets overnight.

The two core factors that investors need to look at when analysing NCM are: commodity prices and financial market volatility. The gold price tracks the commodities basket over the medium to long run. This means you need to look at the broad commodities market if you are a long term investor of NCM. The best time to buy is when commodity prices are suppressed, as they are now.

NCM also spikes when financial market volatility picks up. Gold is a safe haven for investors who want to get out of other assets, such as stocks and bonds. Gold is also a safe haven for those who want to diversify away from holding major currencies, such as the US dollar. That may be because there is inflationary risk, or they have little faith in the Fiat-Money system.

What now for Newcrest Mining?

NCM has been a momentum stock for months. Are we faced with a correction? Perhaps, it’s hard to say. I am bullish on gold producers such as NCM because of the momentum in the price. But I am neutral on gold producers as a whole for the exact same reason.

The gold price has outperformed the market and other commodities by a large margin; the degree of outperformance has usually meant some form of reversion to ‘normality’ in the long run. While I don’t know when that correction is going to come, I know a slow-recovering commodities sector is a long term support factor for gold prices.

Ken Wangdong

Emerging Market Analyst, New Frontier Investor

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