Gold Price Crunch

It's been an extremely volatile year for investors in gold miners, mostly because of volatility in the gold price. Gold began the year not far from multi-year lows at just below US$1,100 per ounce. The Federal Reserve (Fed) had just hiked interest rates and the consensus was that this, and future expected hikes, would be bad for gold. As it happened, gold was about to start a huge $250 run taking the price to just over $1,350 per ounce, a 23% increase in the space of six months.

At the beginning of the year, the share prices of most of the ASX gold miners were only just beginning to recover after years of very weak prices. Newcrest mining (NCM), for example, opened January 4 at $13.17 having come down from a high of above $40 in 2011. The downtrend in the gold price since 2012 had hit the miners hard and pessimism in the sector was at an all-time high. A crash in stock prices, therefore, was just what gold needed. The beginning of 2016 was one of the worst starts to a year for stock prices ever recorded. By early February, the ASX 200 was down 10% from the start of the year. Although bad news for most stock market investors, this was great news for gold miners. The gold price started to surge and the share prices of the miners duly followed. Silver Lake Resources (SLR), a relatively small cap gold miner, saw its share price rise from $0.18 at the start of the year a reach above $0.50 by the end of June, a 2.7-fold gain. This level of gains was not unusual with many of the miners having a similar price increase.

Aside from just the stock price increases, the gold price increase had revived miners cash flows and profitability such that companies were able to finally resume exploration spending and increase  spending on capital development. The bigger companies resumed dividend payments after years of having suspended them including Resolute Resources (RSG) which announced the payment of a dividend in gold. This was a fairly innovative idea where shareholders were able to open an account at the Perth Mint and elect to receive their dividend in the form of unallocated gold at the mint. This would certainly be an attractive option to some investors.

The post-Brexit market environment was to prove to be the high point for gold miners for this year. The gold price surged after the UK voted to leave the EU but over the next couple of months the price failed to hold above $1,350 per ounce. From here on, gold consistently slid downward. Although the Trump victory was theoretically good for gold, and the kneejerk reaction was certainly for higher prices, the market quickly decided that Trump's expected inflationary policies would be supportive of higher interest rates and therefore bad for gold. The slide in the gold price accelerated soon after the election with gold falling almost every day in the month of November. The share prices of the miners followed the gold price down. SAR and RSG both fell 50% from their peaks and NCM fell 33%. Surprisingly, some of the smaller miners didn't fare so badly. SLR is currently 20% off its peak but still up 3-fold for the year. Ramelius Resources (RMS), a small miner with a market capitalisation of $240m, is 25% off its peak but still up over 2-fold for the year.

The spike and subsequent crash in the gold price has certainly made for a rough ride for gold investors but as of today, gold is still up around 5% for the year so overall it can't be considered a bad year. Next year will see the inauguration of Donald Trump and we will find out more details of his policy objectives but one thing the market seems to be ignoring is how Trump will pay for his tax-cut/spending increase policies. The Federal Reserve (Fed) is expected to raise rates three times this year but this was the expectation at this time last year and we only ended up with one hike. At the very least, gold is due for a short-term bounce considering the steep falls recently. Gold investors will be watching the Fed closely next year and will always have in the back of their minds that actions speak louder than words.