Gold is a crisis asset. Uncertainty in the global economy results in investors buying gold as it is considered as the most secure investment option. This makes gold into a safe haven. Gold prices have soared since late April as the pandemic wreaked havoc in global markets. Every time a stimulus is unveiled by the government, gold prices have surged due the possibility of inflation going up.
Higher gold prices increase profitability of gold stocks as their margins go up. This has resulted in most gold stocks being valued higher than they were prior to the crisis, so much so that stock price charts closely resemble the chart of the commodity.
This year, however, we have seen a lot of consolidation in gold prices, just as we predicted back on January 6th, 2021. Gold prices and hence gold stocks have come under pressure because of the risk-on approach that investors have towards equity markets. The arrival of a vaccine and improved economic activity has meant that gold has been put under pressure. The rising bond yields have also meant that gold and silver continued to fall off-late.
Today, however, the Australian gold index AXGD rose for the second consecutive day, soaring 1.3%. As a result, several ASX gold stocks rose as well given that the price of the underlying commodity rose.
Newcrest Mining soared 1.8% and reached A$24.410 today, its highest since 25 February 2021. Going forward, we expect gold prices to perform the same this year. There will be ups and downs, but we do not expect gold prices to see the highs we did at the tail end of 2019. Even though there is inflation coming back in and gold is usually used as a hedge, the fact is that it is a bit more complicated than that. Along with free money being printed by central banks, investors and traders are excited by the ease in restrictions as we move away from the pandemic. This leads to risk-on effect towards equity markets in the short-term – putting a ceiling on bond prices and gold prices. All of the top ASX listed gold stocks of 2020 are down as a result of the macroeconomics at play. For long-term investors, this does open up an opportunity to buy gold stocks on the cheap.
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