KEY POINTS
- Gold has dropped to an 8-month low, dipping below US$4,000 and down more than 11% over the past month.
- ASX gold miners are falling even harder, because their profits and share prices move faster than the gold price.
- The cause is a change in expectations: markets now think the US Federal Reserve will raise interest rates, which makes gold less attractive.
- The big picture, especially heavy central-bank buying, has not broken, so this looks more like a pullback than the end of the gold bull market. Just expect more bumps first.
Gold has tumbled to around US$4,000 an ounce, hitting its lowest level in eight months this week, after falling more than 11% over the past month. ASX gold miners such as Northern Star (ASX:NST), Evolution (ASX:EVN) and Ramelius (ASX:RMS) have been sold off hard alongside it. Yet here is the puzzle: the price is dropping even though central banks are still buying gold heavily, and the long-term case for it has not really changed. So are the miners a falling knife to avoid or a bargain in the making? Let’s break it down.
Why has gold suddenly reversed?
It comes down to interest rates. For most of this year, investors expected the US Federal Reserve to cut rates, which is good for gold. Now they expect the opposite. With inflation proving stubborn, the Federal Reserve has signalled it is more likely to raise rates than cut them, and markets are pricing in a possible hike as early as September. Higher rates and a stronger US dollar make gold, which pays no interest, less appealing, so money has flowed out.
In our view, this is a shift in expectations and positioning, not a sign that gold’s foundations have cracked. The next big test is this Thursday’s US jobs report (the June non-farm payrolls, due 2 July): a strong number could push gold lower, while a weak one could spark a bounce.
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Why are the miners falling harder than gold?
Gold miners work like a magnified bet on the gold price. When gold falls a little, their profits and share prices can fall a lot, because their costs stay roughly fixed while their selling price drops. That is why names like Northern Star (ASX:NST) and Evolution (ASX:EVN) have dropped more sharply than bullion itself.
The good news: most big Australian producers still make strong profits at today’s prices. Northern Star, for example, digs gold out for roughly US$1,400 an ounce and sells it near US$4,000, a healthy margin even after the fall. The more cautious cases are higher-cost or smaller miners with weaker balance sheets, and Northern Star itself has its own issues, including production setbacks and pressure from an activist investor pushing for change.
Falling knife or bargain? The investor’s takeaway
Our view: this looks more like a correction than the end of the bull market. The reasons gold rose in the first place, especially heavy central-bank buying, are still firmly in place, with around 70% of central banks planning to add more gold this year. But do not try to catch the exact bottom. Gold could keep wobbling around the key US$4,000 level, especially around Thursday’s jobs data. For most investors, buying a little at a time rather than all at once is the safer way to build a position in quality, low-cost miners while the dust settles.
In short, the gold price has cracked, but the gold story has not, leaving well-run ASX miners looking more like a bargain in the making than a falling knife, as long as you can stomach the bumps.
