Many investors use gold mining stocks as a ‘leveraged’ play – but this of course works both ways.
Gold has had a rocky 18 months. In 2020, the yellow metal’s price surged up by over 40% from its March 2020 lows, reaching a new record high just above $2,000 an ounce.
Behind this strong performance was increased investor appetite owing to market uncertainty and fear, as well as historically low interest rates. Gold produces no dividend or cash flow. However, with real interest rates at or below zero, its appeal increases.
However, by August of last year, gold prices were already retreating from these highs. Despite some strong rallies, the metal has broadly struggled ever since. Year-to-date, it is in negative territory, with the iShares Physical Gold ETC (LSE:SGLN) down by over 7% in sterling terms.
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The past month has also been a torrid one for gold. As is often the case with asset prices, this is largely the due to the US Federal Reserve. It recently signalled that it would hike rates in 2023, a year earlier than expected. As one of the main drivers of gold prices has been persistently low interest rates, the prospect of faster interest rate rises means lower gold prices. Over the course of June, the iShares Physical Gold ETC is now down around 3.3% (as of 25 June).
However, while June has proven to be a bad month for gold prices, it has been even worse for gold miners. The VanEck Vectors Gold Miners ETF (LSE:GDX) is down 11.3% over the month, while the L&G Gold Mining UCITS ETF (LSE:AUCO) is down almost 14%. The VanEck Vectors Junior Gold Miners ETF (LSE:GDXJ) has fared slightly better, but it is still sitting on a loss of 10.5%.
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Many investors use gold mining stocks as a ‘leveraged’ way to gain exposure to gold price increases. When gold prices rise, typically the price of gold miners increases further. But of course, this works both ways, as we are seeing right now. When the gold price falls, gold mining stocks typically post bigger losses.
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