In what has been a great day for the broader S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) so far, there is one corner of the market that isn't enjoying the renewed bout of optimism.
Indeed, it's been a great year so far for gold bugs. After hitting a multi-year low of just US$1,050 an ounce in December, the shiny metal soared to a high of nearly US$1,250 an ounce around three weeks ago.
This was in part due to the depreciation of the US dollar (caused by weaker expectations of a series of interest rate hikes from the US Federal Reserve), but mostly due to the uncertainty and fear spreading throughout the global economy, related to a slowdown in China's economy, plunging commodity prices and a possible recession in the United States.
Overnight, however, some of those fears were allayed. US manufacturing data was better-than-expected, raising the prospects for an interest rate hike, while an increase in stimulatory measures from China may also help to spark greater growth in the world's second biggest economy.
That's great for equity investors, and one of the primary reasons why shares around the world rallied overnight (and why the ASX 200 has gained 1.5% today). However, it isn't so great for gold bugs because a reduction in fear could reduce demand for the precious metal.
To borrow a quote from legendary investor Warren Buffett (emphasis added):
"Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time. But you really have to hope people become more afraid in a year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money, but the gold itself doesn't produce anything."
So while the local share market is firing on all cylinders today, it mightn't surprise you too much to learn that the five worst performing shares from the ASX 200 cohort are all gold producers.
Newcrest Mining Limited (ASX: NCM), the country's biggest gold producer, has fallen 7.6% to $16.90. Northern Star Resources Ltd (ASX: NST) and EVOLUTION FPO (ASX: EVN) have also shed 6.7% and 6% respectively, while Beadell Resources Ltd (ASX: BDR) and Regis Resources Limited (ASX: RRL) shares are down 3.8% and 4.1%, respectively.
Although all five shares are still sitting on strong gains since the beginning of the year, today's falls stand as an important reminder to investors in the sector. Gold shares will typically perform strongly when the gold price is rising, but they are also at the mercy of a falling gold price.
It's impossible to tell where the gold price will be tomorrow, next week, or even next decade. While it could go much higher, it could also go considerably lower, and that's a risk investors need to acknowledge before they even consider buying into the sector.
