Gold has acquired a new shine for investors.
A combination of rising interest rates and traders spooked out by a market crash has made the precious metal’s returns attractive again after a prolonged slump. The bump in gold prices has occurred across the board. Prices for gold futures have risen higher in response to the turmoil in market indices. On Oct 11 – a day when the Dow Jones index continued its decline into the sixth-straight day – gold futures surged by almost 3 percent. This means that traders were betting that the price for gold, which has been in doldrums since last year, would rise higher.
Stocks for gold miners also rose as investors fled from growth sectors, such as technology, to safe havens. Among the major gainers are Randgold Resources (GOLD), whose stock price rose by 20% in a month, and Barrick Gold (ABX), which witnessed gains of 19.3% during the same time period. Newmont Mining Corp. (NEM), which fell by as much as 22.3% by September this year, is also staging a recovery after the crash in stock markets earlier this month. As of this writing, it is up by 3.5% for this month.
Why Did Gold Crash This Year?
Typically, gold is sanctuary territory for investors during times of market turbulence. But this is the first time that the metal has performed its traditional role in 2018. As this WSJ article points out, the US dollar seemed to have replaced gold at the market’s slide during the beginning of this year. A booming domestic economy and bright global growth prospects also left investors with plenty of options to multiply their profits.
Meanwhile, the heat on gold was palpable as hedge funds shorted the asset class due to lack of returns from gold miners. The world’s largest ETF company VanGuard Group renamed its Precious Metals and Mining Fund to Global Capital Cycles Fund and slashed exposure to gold and mining stocks from 80 percent to 25 percent. In response, gold prices fell below $1,200 per ounce in August this year.
Gold Rises Again
But the chips have turned in gold’s favor in the last month. The VanEck gold miner ETF witnessed an inflow of $278 million from investors in the last month alone. The Federal Reserve has helped matters by sticking to its interest rate hikes despite an angry market reaction. The US dollar has also weakened since its August high.
A consolidation amongst top gold miners offers hope for further recovery. An example of this trend is the merger between Barrick Gold and Randgold Resources. Research firm BMO Capital Markets called the merger, which creates a new company worth an estimated $18 billion market capitalization, “an industry champion for long-term value creation” because the new company “will operate five of the 10 tier-one gold mines on a total cash cost basis.” Such mergers are expected to allay fears of hedge funds, which have formed a coalition to curb the “value destruction” in gold mining companies.