The ASX gold share sector has been a strong performer over the past 12 months, thanks to a significant rally in gold prices.
In general, commodity prices dramatically affect the profit margins of commodity businesses. Production costs don't usually change much in the short term, so rises in commodity prices and, subsequently, revenue largely add to the bottom line (notwithstanding the requirement to pay more in tax).
Gold has been one of the best-performing commodities in the past year, so let's look at what's going on.
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What has happened to the gold price?
According to Trading Economics, the gold price is currently sitting at around US$2,880 per ounce after recently reaching US$2,940. This has been very helpful for investor confidence surrounding ASX gold shares.
Trading Economics reported that market participants are assessing how much demand there could be for 'safer' assets like gold. The outlook for US interest rates could also play a role.
On one hand, US President Donald Trump stated that the US would mediate/negotiate a ceasefire with Moscow over Russia's war with Ukraine, raising expectations that the conflict may come to an end in the near future, supporting 'risk assets' in Europe.
However, on the other hand, gold remains "supported by the looming threat of a trade war between the US and major trading partners after President Trump ordered the Commerce Department to raise tariffs and reciprocate barriers it deems necessary to balance flows", according to Trading Economics.
There were also increased bets of a rate cut by the US Federal Reserve this year because of a sharper-than-expected contraction of retail in the US during January.
Fund manager L1 suggests that the strong rally of gold over the past year has been "driven by increased central bank activity, spurred by growing geopolitical tensions" as well as the fact it provides "an attractive hedge to growing US sovereign debt and inflation". Central bank gold demand has reportedly grown more than 4x since Western nations froze around $300 billion of Russian central bank assets.
On the outlook for gold, L1 said:
We expect the key drivers of gold performance in 2024 to continue over the medium term. Elevated central bank demand is likely to be a multi-year thematic, with China recently resuming purchasing despite the significant increase in prices over 2024.
Specific policy direction from the Trump administration remains unclear, however the role of gold in a portfolio to hedge uncertainty remains key within this backdrop. Trump's policies may prove to be re-inflationary and further de-couple U.S./China relations, shifting the world further to a 'multi-polar' order.
Most significantly, we could see a re-emergence of the traditional relationship between real rates and gold prices in 2025, which could further drive gold demand. With further monetary policy loosening from the Fed, we would expect an increase in physical gold demand from Western investors which had been largely absent during the 2024 rally.
Which ASX gold shares are options?
If you're looking to invest in gold, there are many different-sized gold miners on the ASX from which to choose. Naturally, each has its own positives and negatives and will require careful research and consideration of your investment goals before buying.
Some of the largest gold miners on the ASX could be a good place to start for further research and include Newmont Corporation (ASX: NEM), Northern Star Resources Ltd (ASX: NST), Evolution Mining Ltd (ASX: EVN), Westgold Resources Ltd (ASX: WGX), Ramelius Resources Ltd (ASX: RMS), Perseus Mining Ltd (ASX: PRU), and Genesis Minerals Ltd (ASX: GMD).
As an alternative to investing in individual gold stocks, there are also a number of ASX exchange-traded funds (ETFs) on offer that can provide diversified exposure to both physical gold and gold miners.
