The gold price broke through AU$2,000 today. You can see the remarkable rise below in its 12-month chart:
We note a crossover of 20- and 50-day moving averages at the start of June.
Today we will look at factors that drove this spike and two ASX-listed gold stocks.
Can’t fight the Fed! Cheap money makes gold attractive
Here’s the technical stuff first.
In the US on Wednesday, June 19, the Federal Open Market Committee (FOMC) voted 9-1 to keep the benchmark rate unchanged at between 2.25% and 2.5%.
Crucially though, the accompanying statement said that with ‘uncertainties’ around a ‘sustained expansion of economic activity’ and hitting the 2% inflation target, the Fed would ‘act as appropriate’.
CNBC reports that this was interpreted by markets as a dovish pivot as the word ‘patient’ was dropped from its description of its approach to policy.
Chair of the Federal Reserve Jerome Powell said in a press conference following the statement that ‘many participants now see the case for somewhat more accommodative policy has strengthened.’
All of this stuff is largely for Fed wonks though.
The bottom line is that when the Fed moves to cut rates, markets often work themselves up into a lather.
You can’t fight the Fed they say.
Cheaper money or more liquidity in the system has implications for the strength of both the US and AU dollar.
A weaker Aussie dollar, which at time of writing sits at around 69 US cents, boosts the attractiveness of Aussie gold miner’s exports.
Which is why you may be thinking gold stocks are intriguing…
Has gold’s price rise already been factored into ASX-listed gold miners?
If the gold price continues to rise, gold miners naturally benefit.
The question is, has this already been factored into some of the more popular ASX-listed gold stocks?
Below is the closing share price over the last 12 months for Saracen Mineral Holdings Ltd [ASX:SAR]:
Saracen operates in the ‘mid-tier’ of ASX-listed gold stocks.
With a market cap of around $3 billion at time of writing, its 12-month return of more than 60% compares favourably with ASX-listed gold-giant, Newcrest Mining Ltd [ASX:NCM], which has a market cap of more than $24 billion and a 12-month return of just below 50%.
And as you can see, it has been very solid since around mid-September last year.
Crucially, though, Saracen has a P/E of more than 40 and Newcrest has a P/E of more than 50. So it looks as if these two ASX-listed gold stocks are roughly heading towards growth/tech stock multiples.
I believe this can be tied to a number of investors having the foresight to see an eventual change in Fed monetary policy as well as rising geopolitical risk — something which has traditionally played a role in previous gold price spikes.
Call it distrust of government, call it fear, call it old-fashioned, regardless of the motivations for buying gold or owning gold stocks — it has an enduring appeal for a lot of people.
As far back as October, on a particularly bad day for the ASX, another Money Morning writer was astute enough to notice that gold miners made up the majority of real winners on the day.
Since then, the long money has been pouring into stocks like Saracen and Newcrest.
As with any investment vehicle, there are both bulls and bears.
As well as extreme bulls and extreme bears.
But with some of the ASX-listed gold stocks trading at high earnings multiples, it looks as if the ship may have already sailed for really big share price growth.
Which brings me to my last point.
Physical gold may be a better bet
With gold’s price rise over the last 72 hours, excitement about gold threatens to move from the preserve of the so-called ‘gold bugs’ to something bigger.
But gold is not just a fad — it has been a store of value for humans for a significant period of our civilised history.
Obviously, there are risks associated with any investment.
Downside risks for the price of gold could include a sudden easing of geopolitical tensions. But again, this does not seem likely with North Korea, Iran and China all on President Trump’s menu.
So if gold stocks are not part of your portfolio, and you feel like you’ve missed a flight, physical gold is another option.
There are a range of ways to start thinking about gold, which is why we provide the following free report on the topic. Greg Canavan takes you through the three most important reasons to add gold to your portfolio. It is well worth a read, and Greg’s analysis is spot on.
For Money Morning