At time of writing, the share price of Newcrest Mining Ltd [ASX:NCM] has fallen 3.6% today, trading at $35.45.
It has been a strong year for Australia’s largest gold miner, with a return of 87% on the back of an improving gold price:
With the gold price retracing and having recently come off a 52-week high of US$1,565 and sitting at $1,519, we look at whether the Newcrest share price can sustain its run.
We conclude that the combination of a weak Aussie dollar, reignited trade war tensions and a global economic slowdown, all play into a positive outlook for the Newcrest share price.
Newcrest share price, other gold stocks take a hit on misplaced trade optimism
Along with Newcrest, a host of other major gold stocks like Regis Resources Ltd [ASX:RRL], Saracen Mineral Holdings Ltd [ASX:SAR] and Northern Star Resources Ltd [ASX:NST] took significant hits today.
Gold stocks have a tendency to be negatively correlated with markets, so when optimism runs high, investors shift their money out of the safe haven.
After coming off its all-time high in July, the ASX has been gyrating between 6400 and 6650.
Reuters reports that White House economic adviser Larry Kudlow said the following to reporters at the White House on September 7:
‘We would like to go back to where we were last May, but I don’t know if that’s possible, and I don’t want to predict any outcomes. This is a difficult matter.’
Markets responded with optimism that the US and China might be finally moving in the right direction again.
This came just after Fed Chair Jerome Powell reiterated that the US central bank would ‘act as appropriate’ signalling the possibility of further cuts.
Added to the mix was the Chinese central bank’s move to cut the RRR (reserve requirement ratio), freeing up US$126.35 billion of liquidity.
The most recent US jobs data was mixed as well — retail hiring down, but strong wage growth.
Markets appear to be living in some alternative bizarro world where bad data is actually good news as it hastens the arrival of stimulus and QE.
Such is the predictable nature of governments and central banks in the age of negative interest rates.
And, all of this was enough to shift money away from gold over the last few days.
Gold stocks like Newcrest naturally suffer in this environment.
Profiting from gold doesn’t need to be perfectly rational
But it pays to filter out the market noise when thinking about the outlook for gold.
Given recent history, it seems quite likely that US–China trade talks will break down again sending markets down and gold up (again).
With an average of around 10 tweets a day, Trump will almost inevitably say something that injects further fear into global markets, which naturally filters down to the ASX.
Australia is caught between the two adversaries, and the RBA may follow the RBNZ to a cash rate of zero.
This has the effect of keeping downward pressure on the Aussie dollar, which benefits Aussie gold miners.
As a result, gold and gold stocks like Newcrest could remain appealing in an environment where the trade war rumbles on, global growth slows and the AUD is weak.
So if you think the ASX has significant downside risks, the upside for gold is in plain sight.
You could call it ‘going long on chaos’.
In a similar vein, Newcrest and other major Aussie gold stocks seem to have become the investment vehicle of choice for this kind of perspective.
If you think the following:
- RBA will cut rates (looking likely)
- Global growth will slow (as above)
- Trade war will get worse (as history suggests)
Then gold is worth your consideration, as bizarre as gold’s value may be.
In conclusion, investments don’t always need to be perfectly rational — but they do need to be profitable.
For The Rum Rebellion
PS: In an exclusive new video interview, Greg Canavan talks all things gold with Richard Hayes, CEO of The Perth Mint. Click here to watch.