Most of the large gold miners are trading down today.
What’s going on?
2020 has been quite an interesting year so far, one with plenty of open battlefields.
There’s the global fight against the pandemic and there’s the US-China trade war. But investors are also in the middle of a tug of war between stimulus and risk.
What I mean is, since the pandemic started, the US Fed has been pumping liquidity into the economy to counter the economic effects of the lockdowns and the pandemic.
They brought interest rates down close to zero. They’ve also said they will be keeping interest rates low for a long time, allowing inflation to run higher than their 2% target. This is effectively negative interest rates, which is good for gold.
But it’s also been pushing the value of the US dollar down. So far since March, the AUD has gained over 28% against the US dollar.
It isn’t only the AUD. Looking at Bloomberg’s dollar index spot, which measures the US dollar against a basket of six major currencies, the US dollar has been in decline from March to September, as you can see below.
I mean, that’s no coincidence. March was the start of the pandemic, but also lower interest rates and more money printing.
So far central bank policies have supported US stock markets, even when unemployment has increased.
The question here is, how long can the US Fed keep the stimulus coming given that interest rates are at a low 0.25% and their balance sheet is already at US$7 trillion?
Markets have been asking themselves this same question.
And, then there’s the US election coming up too, which isn’t looking like it will run smoothly. With so much risk building up, investors have started to flock to cash, and the US dollar. You can see the uptick in the US dollar in the chart above.
After all, the US dollar is also considered a safe haven.
What could happen next?
In the last couple of weeks, gold has lost around 3.5% against the US dollar. But gold has had a stellar year, nonetheless. Even with the recent declines, gold has increased over 24% year-to-date.
We could see the US dollar rally into the election as investors look to decrease risk.
Gold is known to be volatile, but the current price drops could be a good buying opportunity.
One way to get exposure to gold is through buying gold directly. Another is through gold stocks, like gold miners. These can be very rewarding, but also risky.
It’s why Rum Rebellion’s editor Greg Canavan has prepared a guide on ‘How to Pick Winning Gold Stocks’.
You can access Greg’s free report here.