Gold producers are defying a broadly gloomy week on the Australian sharemarket and surging on a long rally in the price of bullion that has been driven by the prospect the Federal Reserve will start cutting interest rates and amid concerns about the central bank’s independence.
Bullion edged to a new high above $US3600 ($5520) an ounce as investors rushed to the haven asset amid a risk-off sentiment.
Gold has risen more than a third this year. The latest run has been propelled by expectations the central bank will lower rates this month, concerns over its independence after Donald Trump fired Fed governor Lisa Cook, and questions over the legality of the US president’s trade tariffs.
“These drivers bring back into focus the preference for gold over traditional safe‑haven assets like the US dollar and US bonds,” Commonwealth Bank commodities strategist Vivek Dhar said in a note on Wednesday.
“We saw this play out in early April when Trump announced his tariffs, as gold surged, while the US dollar weakened.”
Dhar added that while haven demand was “notoriously difficult” to predict, he believed his forecast for gold to average $US3500 an ounce in the fourth quarter this year already looked “too low”.
State Street Investment Management Asia Pacific gold strategist Robin Tsui said in his “bull case” scenario, gold could reach nearly $US4000 an ounce within the next 12 months if trade and tariff tensions escalated further.
“A weakening US economy and more Fed rate cuts than anticipated could accelerate gold’s move toward the bull case,” he said.
ASX-listed gold miners continued to rally on Wednesday, despite a brutal sell-off overall, with Australian shares falling for a fourth straight session in the worst one-day drop since April amid soaring bond yields.
Bellevue Gold lifted 2.8 per cent to 91¢, while Northern Star edged up 0.5 per cent to $20.20, Vault Minerals 0.9 per cent to 57¢, and Regis Resources 0.4 per cent to $4.86. Evolution and Newmont’s gains, however, were capped due to going ex-dividend.
Wilson Asset Management portfolio manager John Ayoub described the dual-listed Newmont, the world’s largest gold miner, which has risen more than 90 per cent this year, as the “Commonwealth Bank of the gold space”.
“They have the big assets in the best geographies, and we should see resilient production growth and performance over the next couple of years,” Ayoub said. “It is the default, and the biggest gold weighting in our portfolio.”
However, Ayoub said he would consider reducing his exposure to Newmont if the price of gold edged closer to $US4000 an ounce. “It does feel like we are getting close to the end of the gold rush,” he added.
Newmont’s prospects could be even better if it succeeds in cutting costs by as much as $US300 an ounce, having brought in Boston Consulting Group to help it assess its structure and operations. If it proceeds with plans, the company will have to reduce its headcount by thousands.
Newmont’s all-in sustaining costs have risen more than 50 per cent in the past five years, driven by higher energy, labour and material prices. Much of that increase is thanks to its acquisition of Newcrest, the Australian gold mining giant that had operations in Papua New Guinea and in NSW.
CMC Markets head of premium client services Fraser Allan said Newmont had demonstrated balance sheet discipline by using wider margins to reduce its net debt. He added that it had top-tier, life-long reserves and strong cash generation, with a price-to-earnings ratio of 13.
“It is easy to see why investors may make the case for the stock being undervalued,” Allan said, cautioning it still had to manage its transition to a new CFO after the surprise resignation of Karyn Ovelmen in July, with Peter Wexler currently serving as her interim replacement.
Seb Mullins, head of multi-asset and fixed income in Australia for Schroders, said the gold rush was triggered by concerns that an “overly dovish” Fed pressured into making aggressive rate cuts by the Trump administration would in turn push inflation higher.
“We have seen Trump spur investors to purchase gold as a way to protect portfolios from higher inflation or stagflation risks,” he said.
“This should bode well for gold miners, who have seen margins improve given the gold price has risen well above their cost base.”
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