Today we will be talking about the rising gold price and how this feeds into the growing risk-off sentiment in global markets. We will also look at two mid-cap Aussie gold miners that are benefiting from this trend at the moment.
12-month gold price versus six-month gold price
Have a look at the 12-month gold price:
Not that inspiring if you got into the market at the start of last year.
Now look at gold over a six-month period:
That’s a pretty reliable trend, and one that has increased in force since around mid-November.
Why is gold doing this?
A large part of it comes down to political and economic risk.
Let’s examine some of the big stories around November of last year.
During this period we saw Federal Reserve rate hikes, an expansion of the trade war and a slowing global property market.
Basically, things got choppier and investors started heading towards a perceived safe haven — gold.
In many ways, the prospect of a global recession is one of the most prophesised economic stories of the year.
Markets are still in decent shape, but people know something big is out there.
Which leads to the growing risk-off sentiment, and the increasing interest in gold after a long, dormant period.
Leveraged loan market could be the trigger for gold price
As for the big hidden monster that could annihilate markets this year, I think it is likely to be growing awareness of leveraged loans.
A leveraged loan is broadly defined as a type of loan extended to a company that already has a considerable amount of debt or bad credit, and is frequently used in leveraged buyouts by private equity firms.
The problem is they are packaged in an opaque manner via collateralised loan obligations in much the same way as the GFC-era subprime mortgage backed securities.
And the total value has been growing:
Source: Financial Times
Given this feature of the current market, if you are trading on the ASX, I believe the current political and economic risks will continue to play into the hands of mid-cap gold miners.
For reference, let’s have a quick look at these two stocks:
Bear in mind this is the six-month chart, and as you can see, both have been performing well since around November.
So with the trade war set to rumble on and markets getting the jitters, now could be a good time to ride the wave.
Take note, this wave may not last forever, as gold has been hit before when there is a major market sell-off.
That is, when all the equities get crushed.
So maybe look at it like this — be prepared to jump on and off quickly.
Finally, if you are interested in further discussion of the relationship between risk and gold, check out my colleague’s video below.
For Money Morning