Since mankind discovered gold, it has been irresistibly drawn to the lure of the pretty material. Yet that sure wasn't much in evidence on Monday, as the price of the precious metal swooned, followed by those of gold stocks.
A great many titles in the sector posted uncomfortable price declines across the day's trading session. When the market closed, Gold Fields(NYSE: GFI) and Iamgold(NYSE: IAG) had both fallen by more than 8%. AngloGold Ashanti(NYSE: AU) and Harmony Gold Mining(NYSE: HMY), meanwhile, were a bit deeper in the red with declines around 9%.
Strengthening dollar, weakening sentiment for other assets
Although the gold price was getting battered that day, it wasn't exactly a reversal from previous sessions. The metal hit an all-time high on Oct. 30, and since then it's been in retreat for the most part.
There are several reasons for this. As ever when an asset rises notably, many investors are tempted to sell it in the hope of getting out at or near a peak. This was likely happening with gold, and this can lead to something of a copycat effect shortly thereafter.
Another major factor is the comedown from Election Day and business-friendly Donald Trump's unexpected victory in the presidential race (which led to a brief pop in the otherwise sliding price).
Trump has pledged to impose punitive tariffs on countries that actively export to the U.S. like China. Tariffs tend to strengthen the U.S. dollar due a number of factors, one of the main ones being that they have a habit of driving up inflation with the sudden spike in U.S. demand for domestic products. To combat inflation, the Federal Reserve (Fed) is likely to raise its key interest rate, making the dollar more attractive and therefore bumping up its value.
When the dollar strengthens notably, like it has in recent days, this can have a negative effect on dollar-denominated assets. That's largely because investors operating in other currencies are forced to pay more for them. This is contributing to the gold sell-off which, as ever, is having a direct impact on the stocks of companies that mine it.
This ride could get bumpy
After such a long period in which investors were basically euphoric about gold, it's possible we're entering an era of uncertainty for the metal. While it remains to be seen exactly how Trump's plans take shape, the market is wary right now, and it doesn't feel as if this is a brief correction or reset. It might be best to sit on the sidelines with both gold and gold stocks these days.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
