Rising Gold Price Points to Risk-Off Sentiment

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.

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12-month gold price versus six-month gold price

Have a look at the 12-month gold price:

Gold Price

Source: tradingview.com

Not that inspiring if you got into the market at the start of last year.

Now look at gold over a six-month period:

Gold Price

Source: tadringview.com

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:

Gold Price

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.

This includes Saracen Mineral Holdings Limited [ASX:SAR] and Regis Resources Limited [ASX:RRL].

For reference, let’s have a quick look at these two stocks:

Gold Price

Source: tradingview.com

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.


Lachlann Tierney

For Money Morning

PS: Free Guide: How to invest in gold for 2019. Download now.


Lachlann Tierney is an Analyst for Money Morning and has been investing for nearly a decade. With a Masters of Science from the London School of Economics, he brings a sound understanding of global markets to his writing. Lachlann is interested in emerging technologies, energy solutions and helping people invest their money wisely. Recently he has been working with Ryan Dinse. Lachlann is involved in two publications:

Money Morning Australia