It’s no secret that gold prices have soared in the month of June. Last week gold broke the AU$2,000 per ounce mark for the first time. You can see the impressive performance in the year-to-date chart below.
The past month has seen the price spike by a massive 12.05%, which has been pushed along by record low interest rates.
Although the current price is a way away from reaching the lofty high of US$1,917 back in August 2011, slow growth and a low cash rate could mean we’re headed in that direction.
Energetic spot price good for Aussie miners
Record low interest rates in both Australia and the US has been the number one cause for investors’ renewed interest in the yellow metal.
Overnight, the US spot gold price climbed another 1.6% higher to US$1,423 per ounce — a price not seen since April 2013.
Three of Australia’s biggest gold producers in terms of relative market cap size have been benefitting greatly from the rush back into gold.
With a bump in spot price overnight, Aussie miners Newcrest Mining Ltd [ASX:NCM], Northern Star Resources Ltd [ASX:NST], and Saracen Mineral Ltd [ASX:SAR] are all trading 1.63%, 1.03%, and 9.23% higher today, respectively.
I looked at both NCM and SAR last week, discussing whether the rise in gold price had already been factored into their prices.
So, I thought I’d focus on NST today. Take a look at the graph below. It shows the correlation between NST and the gold price since the beginning of the year.
As you can see, barring a few instances, the movements of NST’s stock price are closely related to the movements in the spot gold price.
Northern Star has also outperformed the other two miners over the past 12 months, generating a whopping return of 80.28%. It also has a lower price-to-earnings ratio of 36.3, meaning it is technically undervalued in comparison to NCM and SAR.
If we’re expecting gold prices to continue to push higher in the face of record low cash rates, then it’s a good chance NST will continue to follow gold.
Is gold price likely to reach its peak again?
When gold hit its peak back in 2011, global markets were still crawling their way out of the hole they fell into during the GFC.
Notice that gold didn’t reach this peak during the GFC. In fact, the price of gold declined during that period. It wasn’t until midway through the crash it began to pick up. It took the massive sell off in August and September of 2008 before money really began to funnel into gold.
Why? Because the effects of the financial crash were at the forefront of everyone’s minds and investors’ tolerance for risk was at an all-time low.
About a decade later, the rise in gold has a different catalyst. Low interest rates mean some people are just looking to stay ahead of inflation. Gold has been the traditional store of value for a significant proportion of human history.
So, while interest rates remain low, the gold price is likely to push higher.
The other compounding factor is that ‘risk-free’ assets, like government bonds, are now more expensive than regular securities. Australian 10-year government bonds recently traded below 1.5% and had a price-to-earnings ratio of about 66. Compared to Australian stocks, which have a price-to-earnings ratio off about 16, that’s pretty expensive.
While we may not see the rapid rise in the gold price in the three years leading up to its peak, there are certainly strong signals the spot price is heading upwards.
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