At time of writing, the share price of Newcrest Mining Limited [ASX:NCM] is up 1.55%, trading at $36.78.
Along with the Newcrest share price, a number of other ASX gold stocks are in the green.
Here’s a quick summary of what we will discuss today:
- Germany on edge of recession
- Draghi and ECB’s flirtation with Modern Monetary Theory (MMT)
- Trump pushing for negative rates
- Opportunities to pick winning gold stocks will continue to be available in this environment
The biggest winner so far today is Red 5 Limited [ASX:RED], which is up 6.56% today on the back of a massive 450% return over the last 12 months:
While major gold stocks like Newcrest may be a safer bet, the Red 5 story gives credence to the idea that smaller gold stocks may offer better returns as money continues to flow into gold.
Newcrest share price retraced on trade-war hopes, could be set for new run
The gold price sits at US$1,528 ($2,246) an ounce and this is the gold price in AUD over the last three months:
With market movements increasingly revolving around the US president’s twitter feed, his comments on 12 September likely hurt the gold price.
As per the Financial Times, this is what he said:
‘I see a lot of analysts are saying an interim deal, meaning we’ll do pieces of it, the easy ones first…But there’s no easy or hard. There’s a deal or not a deal . . . It’s something we would consider, I guess.’
As you can see in the above chart, the easing of trade tensions, a glimmer of hope, drove gold prices down.
This retracement affected the Newcrest share price, but here are a few reasons why the gold price could continue to surge.
Reason #1: Germany is on the cusp of recession
A day after these comments on 13 September, it emerged that the German economy had contracted 0.1% quarter-on-quarter.
Now Germany is Europe’s largest economy and a second quarter-on-quarter retraction would mean they are in a technical recession.
Germany effectively runs the show in Europe, and countries like Spain, Greece and Italy, Portugal and Belgium, are all well-known to be suffering from high debt-to-GDP ratios.
Since these countries are all bundled together under the banner of the EU — weakness in Germany could have flow on effects to ECB monetary policy.
Reason #2: Draghi is on the warpath, toying with Modern Monetary Policy (MMT)
Mario Draghi, the president of the European Central Bank (ECB) has recently been quoted as saying the following with regards to MMT, as per Bloomberg:
‘These are objectively pretty new ideas…they have not been discussed by the Governing Council. We should look at them, but they have not been tested…When you look at them closely, you realize the task of distributing money to one subject or the other subject, that’s typically a fiscal task…It’s a government decision, not the central bank…It’s the political governance of these ideas that needs to be addressed.’
MMT in a nutshell, has three core ideas according to Steven Hail of the University of Adelaide:
1) Monetary sovereign governments face no purely financial budget constraints.
2) All economies, and all governments, face real and ecological limits relating to what can be produced and consumed.
3) The government’s financial deficit is everybody else’s financial surplus.
Let’s call this what it is: infinite free money.
It’s a radical idea, and one Draghi is clearly considering. He’s done his bit by driving rates into negative territory.
Now governments need to splash the cash as well.
All of this could light a fire under the gold price as investors grow wary of a phony world of asset prices driven by central bank policy and fiscal stimulus.
Reason #3: Trump wants negative rates too!
Trump is looking across the Atlantic with envy as the ECB juices things to the max.
Here’s his tweet from 11 September:
Any further moves down from the Fed could further play into the hands of savvy gold investors…
Newcrest safe, but keep eyes peeled for emerging producers
All of these developments lend weight to the idea that gold stocks will continue to thrive for an extended period of time.
Newcrest could be seen as a safer bet — but at the same time emerging producers like Red 5 have a certain appeal.
Especially considering they could be potential takeover targets as big gold companies like Newcrest hunt for ways to expand their reserves.
So if you have enjoyed our analysis today, we have three great resources for you.
There’s our editor Greg Canavan’s interview with the Perth Mint CEO which can be accessed here.
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