Gold plunges to lowest level in two years: Are ASX-gold miners looking oversold?

Gold has done little to reaffirm its moniker as a safe-haven asset with the price of the precious yellow metal having fallen to the lowest since April 2020 on the back of renewed fears of a US recession, which led to more aggressive interest-rate hikes by the Federal Reserve (The Fed).

Instead of playing its traditional role as a hedge against tough economic times, gold appears to have reacted negatively to the prospect of higher interest rates in the US.

John Feeney, a business development manager at Sydney-based bullion dealer Guardian Gold Australia told Bloomberg that investors seeking a flight to safety are still looking to the US dollar rather than gold.

“That should last in the short term, but if we see a significant amount of equity market volatility we may see bullion make up some lost ground as a safe haven,” Feeney Noted.

What did the data reveal?

The Fed is now expected to implement a rate hike of between 75 and 100 basis points next week (and a terminal rate around 4.5%), following a fresh round of mixed US data, including:

• Applications for US unemployment insurance fell for a fifth straight week, suggesting demand for workers remains healthy despite an uncertain economic outlook.

• Retail sales unexpectedly rose in August, but the prior month’s number was revised sharply lower.

• Total industrial production, including mining and utilities, fell.

Adding to investors angst, recent data within the US consumer and producer price indexes reveals heightened inflationary pressure in the economy.

In short, what may also force the Fed’s hand to raise rates higher than expected when it next meets are stronger than expected retail sales.

What happen to the gold price?

Much of gold’s 9% slide this year is being attributed to the Fed’s aggressive rate rising, plus award pressure from an advancing US$, which effectively undermines the appeal of assets bearing no interest.

• Gold down -3.1% to US$1,660 in the past week, but is currently trading at US$1663.45.

• Bullion fell 1.9% and dipped below a key support level of US$1680 to US$1677.30.

Is gold now oversold?

Dragged down by the underlying strength of the US$ amid mounting fears of a global recession, gold fell below a key technical level of US$1,800 per ounce in the first week of July.

Overall, gold equities continue to lag bullion, on the 12 months to 31 July 2022, and the price of gold has risen 2.86% (in Australian dollar terms), while the NYSE Arca Gold Miners Index (GDX Index) has fallen -19.45% over the same period.

Where will gold go from here? While it’s hard to say, investors should look to the US$ and any suggestions of an end to the Fed’s tightening cycle.

Where to for ASX-listed gold stocks

The S&P/ASX All Ordinaries Gold (XGD) Index, a benchmark for Australian gold companies is down -28% year-to-date.

Since peaking early-August 2020, the sector's market cap is down by around 50%.

Are these stocks value-plays

Based on the brokers covering gold stocks (as reported on by FN Arena) the following gold stocks appear to be trading at significant discounts to 12-month target prices:

• Northern Star Resources (ASX:NST): 35% upside to target price of $10.02.

• Perseus Mining Ltd (ASX: PRU): 38.7% upside to target price of $1.98.

• Newcrest Mining (ASX: NCM): 32.4% upside to target price of $21.97.

• Evolution Mining (ASX: EVN): 35.2% upside to target price of $2.75.

• St Barbara (ASX: SBM): 265% upside to target price of $1.38.

• Resolute Mining (ASX: RSG): 45% upside to target price of $0.35.

Resolute Mining share price over five years.