Shares in ASX-listed gold miners have posted big falls across the board this morning as investors react to the prospect of the US Federal Reserve lifting cash rates within just the next few weeks.
If the Fed doesn't move in June it can be expected to do so within the next couple of months after a raft of positive US economic data was backed up by comments from the Federal Reserve chair that investors would do well to prepare for a coming rate hike.
Another shot in the arm for the US rate hike cycle will see the US dollar appreciate strongly against a basket of major currencies and this could see gold prices fall below US$1,000 an ounce according to a research note put out by investment bank Citigroup this week.
The Wall Street Journal reporting that Citi believes the gold price could fall 20% if the US dollar moves to multi-year highs as a consequence of tightening monetary policy from the Fed Reserve.
Gold futures have already posted back to back weekly falls as the yields on cash equivalents and other money market US-dollar denominated securities, or longer-term US treasuries rise. This wrecks the allure of non-yielding gold, which is traditionally seen as a hedge against macro-economic weakness.
ASX gold miners do enjoy a margin boost as the US dollar rises, but this would have little net effect if the value of gold plunges more than 20% as the world economy hits its straps after a return to inflation in the US and bottoming of global deflation that was driven by the great commodity crash of 2015/16 that now appears to have run its worst.
Recently, one of the world's most respected economic historians, Niall Ferguson, was quoted by The Australian Financial Review as stating that Q1 2016 would be looked back on by economic historians: "As the turning point, that was the end of the hangover induced by the GFC."
If Ferguson is correct in his prediction that the world economy is set to pick up (just as it did between 1979-1982 after a period of super-inflation) then the prices of ASX-listed gold miners could have a long way to fall.
Some of the price falls among the gold miners today include:
- Newcrest Mining Limited (ASX: NCM) down 4.3% to $19.19
- St Barbara Ltd (ASX: SBM) down 3.5% to $2.51
- Northern Star Resources Ltd (ASX: NST) down 2.9% to $4.40
- Silver Lake Resources Limited (ASX: SLR) down 4.6% to 47 cents
- Regis Resources Limited (ASX: RRL) down 2.3% to $2.98
- EVOLUTION FPO (ASX: EVN) down 1.2% to $2.1o
Australian gold miners still enjoy some very healthy margins, which should limit some of the downside. However, if I owned any gold miners on the ASX I would still book some profits and look to invest the funds in businesses that can keep growing profits and dividends regardless of the cyclical swings in commodity prices.
