Gold prices have risen strongly since the beginning of the year. At the time of writing, one ounce of the shiny metal is trading for US$1,217.79, which marks an increase of nearly 6% on its price at the beginning of the year.
That, in turn, has put a rocket under the share prices of a number of gold miners. Consider some of these impressive returns, keeping in mind that we're just over three weeks into the new year…
- St Barbara Ltd (ASX: SBM) is up 17.9%
- Beadell Resources Ltd (ASX: BDR) has gained 20.4%
- Regis Resources Limited (ASX: RRL) is up 10.1%
- Newcrest Mining Limited (ASX: NCM) and Northern Star Resources Ltd (ASX: NST) are up 8.7% apiece; and
- EVOLUTION FPO (ASX: EVN) has risen 5.7%
However, investors in the sector shouldn't get too comfortable. A number of risks are facing the shiny metal which could, in turn, ruin what those investors currently have going.
The reason why the gold price has rallied so hard in 2017 is because of the weaker US dollar. The greenback has weakened against a basket of other currencies, making it cheaper for international buyers to purchase.
But although President Donald Trump has been vocal recently about his desire to have a weaker currency, his pro-growth economic policies appear more likely to see the greenback strengthen, from here.
What's more, interest rates around the world are likely to remain low for some time yet. In Australia, for instance, the RBA is likely to keep interest rates at just 1.5% this year while potentially looking to start increasing them in 2018 (although some economists believe they could actually fall further from here).
It's a different story in the United States. Donald Trump is eager for the Federal Reserve to start hiking interest rates, with as many as three rate hikes potentially on the agenda this year. Higher US interest rates and greater economic growth (assuming Trump follows through with his pro-growth policies) would likely attract more capital to US shores, thus boosting the value of the US dollar. Sorry, gold investors!
Foolish Takeaway
Betting which way the price of any resource will go is inherently difficult to do. Although gold could also rise from here, it seems a risky bet, considering the potential headwinds the shiny metal is facing. I'm steering clear, and believe there are plenty of other investment opportunities to take advantage of instead.
