What’s really driving the gold price to record highs puts ASX gold miners on upgrade path

The spot gold price surged to its highest level since 2011 on Friday and a new tailwind is likely to lift it above its all-time record high.

The precious metal jumped another 0.8% at the end of the week to US$1,902 an ounce and is now less than US$20 away from its peak of US$1,921 per ounce set nine years ago.

While many of the factors supporting the safe haven asset was touched on many times before, the tailwind that’s drove the gold price above the psychologically important US$1,900 level isn’t so obvious.

Gold finds a new friend

This is the weakening greenback with the US Dollar Index (a measure of the US dollar against a basket of other major currencies) slumping to a two-year low.

The US Dollar Index slipped 0.4% on Friday to 94.35 and has fallen over 8% since the height of the COVID-19 market meltdown in March.

The other big drivers of the gold price are well documented. Record low interest rates and money printing by central banks, including Australia and the US, have created a favourable backdrop for the commodity before the exchange rate gave it the extra push to retake US$1,900.

Tailwinds to persist

What’s more, the US dollar tailwind isn’t abating. You don’t need to be a technical analyst to see that the chart is indicating the path of least resistance is down for the almighty dollar – at least in the near-term.

US Dollar Index (DXY) – 1 Year

Source: Market Watch

The inability of the US to control the rate of COVID-19 infections and deaths is behind the bout of US dollar weakness. No one believes this situation is about to change anytime soon and this means its currency will remain under pressure.

Lack of safe havens to fuel gold’s bull run

The US dollar is the world’s reserve currency and a safe haven for nervous investors. But when the problems in the US are this deep, investors aren’t willing to shelter under the dollar.

This has implications for the other globally recognised “risk-free” asset – US government bonds. While the value of these bonds will likely hold up well in any crisis, investors could still be nursing a loss on the currency unless they hedge this risk. This adds an additional layer of cost and complexity.

A similar thematic is emerging for the Japanese yen with the risk of a second wave outbreak emerging in the country.

Gold likely to keep running through 2021

Gold is standing tall as the world runs out of safe haven assets, and I don’t believe this uptrend will turn until the US dollar regains its risk-free status. This probably won’t be until sometime in 2021 or 2022.

What this means is that gold is likely to breach the US$2,000 level – something that I forecasted in April. If it does, it may very well stay above that bullish level for much of the next 12 to 24 months.

ASX gold miners on consensus upgrade cycle

As most analysts aren’t forecasting the yellow metal to break and hold above its 2011 record high, this could prompt them to upgrade their earnings forecasts and valuation for ASX gold miners.

This could see major producers like the Newcrest Mining Limited (ASX: NCM) share price, the Evolution Mining Ltd (ASX: EVN) share price and Northern Star Resources Ltd (ASX: NST) share price rise further in FY21.

The only thing is that investors may now favour ASX gold stocks with overseas mines instead of local operations.

When gold was rising before the COVID-19 outbreak, it was doing so while the Australian dollar was falling. This gave local gold mines an extra boost as their cost base is denominated in the weakening Aussie.

The opposite is now happening in the second phase of the gold price rally.

More reading

• How to take advantage of the surging gold price
• Brokers name 3 ASX 200 shares to buy right now
• ASX 200 sinks 1%: IAG cancels final dividend, tech shares tumble, IGO jumps
• Why Afterpay, Evolution, IAG, & Vicinity Centres shares are dropping lower
• 5 things to watch on the ASX 200 on Friday

Motley Fool contributor Brendon Lau owns shares of Evolution Mining Limited and Newcrest Mining Limited. Connect with me on Twitter @brenlau.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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