There’s only one place to be looking in Australian shares right now: The gold sector.
The yellow metal punched into new highs in overnight trade — for you and I, anyway.
You can ‘thank’ the Aussie dollar. The more it sinks, the more gold goes higher in local currency terms.
If you’re a gold producer in Australia, your margins are going up, without doing a great deal to deserve it. Very nice for some!
There could be a big bull run in gold-producing stocks brewing on the ASX.
It would appear there’s no reason for the good times to slow down anytime soon, either.
Just consider what the traders are saying right now…
Let’s go back to December. The US Federal Reserve projected two more rate hikes in 2019.
That was down from the Fed’s previous forecast of three.
There’s a disconnect here.
Traders who bet on the direction of interest rates are pricing in no rate hikes from the Fed in 2019.
We can see this from the federal fund futures contracts.
Will the market or the Fed be proved correct?
Right now, I have no idea. It’s too early to say which way the world will go.
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But we can infer one thing…
The appeal of gold is a lot better with no rate hikes than two.
Gold is likely to catch a bid from the market if it thinks the Fed is off base.
Gold in US dollars has been creeping up since November.
Last year, you might recall that I suggested keeping an eye on the American Gold Bugs Index [AMEX:HUI].
This is a basket of US gold producers with close exposure to the market price.
It’s been creeping up, too.
Think of the basic equation for you and I…US dollar gold is going up while the Aussie dollar is going down.
That’s why the action is really for us here in Australia…
Aussie gold stocks are the place to look
US gold stocks aren’t making much money, with gold around US$1,280.
Aussie gold stocks are much better placed, with Aussie gold fetching AU$1,838.
Be warned: Not all gold shares are created equal.
The amount of money they make depends on their costs of getting it out of the ground.
It also presumes they can hit their production targets.
Those are the risks of the game.
Some gold stocks may have hedged their 2019 sales at lower prices, too. This is when a company fixes a price for gold to be delivered in the future.
Hedging is a defensive move to protect cashflow most of the time. It guarantees certain revenue for the company.
The trade-off is that they’ll miss out on the current surge, depending on how long it lasts.
This is where you need to do some homework.
Often there might be a mixed strategy where some portion of production is hedged and the remainder left to fetch the market price — whichever way it goes.
For example, St Barbara Limited [ASX: SBM] is a highly regarded gold producer on the ASX. In December, it announced that it was hedging another 50,000 ounces of gold to take its total to 200,000 ounces, sold forward at a fixed price.
Some gold companies, however, will be able to cash in on the current prices on everything they have.
The market will figure this out pretty quickly and price it in.
A ‘cheats’ way to filter out the most likely candidates is to keep an eye on a rolling 52-week-high scan.
Then use the names it throws up as a shortlist to investigate the appeal of the stock further.
You have to know if you’re trading or investing here. The dynamic behind gold right now could shift at any time.
Here’s the deal: The momentum is pretty weak across the Aussie market — except in the gold sector. You can make money fast if you can catch these waves at the right time.
If you’re looking for a short-term punt, I say start looking here first.