ASX gold shares have lost their lustre as fear truly turned into greed on our market.

The S&P/ASX 200 Index (Index:^AXJO) recorded another big jump on Tuesday. The top 200 benchmark recovered by 35% since its bear market low point back in March.

While there are fears that we could be retesting that low come the next profit reporting season in August, I seriously doubt any sell-off will be that bad.

If bullish sentiment is to persist as I suspect, does it mean it’s time to sell ASX gold miners?

Is gold losing its shine?

Gold is seen as a safe haven and it outperforms during times of distress. But it usually lags when the good times return.

The bulls are emboldened by better than expected economic news. Unemployment and the economic contraction from the COVID-19 crisis aren’t as bad as originally forecast.

This explains why gold miners are among the worst performers on the market today. The Evolution Mining Ltd (ASX: EVN) share price, Northern Star Resources Ltd (ASX NST) share price and the Gold Road Resources Ltd (ASX: GOR) share price shed between 5% and 9% each.

Safety first

However, it would be a mistake to go underweight on gold stocks, in my opinion. If anything, this is the perfect time to add to positions for those who have limited exposure to the sector.

This is because my optimism towards gold isn’t hinged on the steepness of the coronavirus curve. There’s a bigger driver for gold, and it’s loose monetary policy.

Make no mistake, this policy will be in place for a long time even as we squash the coronavirus curve.

Record low rates here to stay

For one, Australia cannot wean itself off record low interest rates even as we emerge from the COVID-19 recession.

Record household debt and weak wage growth means any lift in rates could send many to the wall – and that means the RBA’s hands are tied when it comes to lifting the cash rate.

Then there is the problem about government debt as our country will probably need an entire generation to pay off the bills from the large COVID-19 stimulus programs.

Burgeoning government debt

More importantly for gold, the US is in a worst situation. I say worst because the US dollar tends to be negatively correlated to the gold price.

The ballooning US debt will weaken confidence towards the greenback and that will keep the precious metal in investors’ good books.

The US budget deficit is tipped to quadruple in 2020 to nearly US$4 trillion, reported Bloomberg which quoted forecasts by the Committee for a Responsible Federal Budget (CRFB).

Buy the gold dip

This estimate only includes the already announced support packages passed by US congress. There’s talk that US President Donald Trump is planning on adding another US$1 trillion to pull his economy out of the worst recession since the Great Depression.

And he has a great incentive to spend big as he’s facing re-election this November.

The rest of the world is also likely to increase government spending to get their economies growing again, and this will only add to the appeal of the yellow metal.

Gold’s bull run will continue well past the COVID-19 crisis.

More reading

• Why the CSL share price continues to trail the ASX 200
• The ASX bank dividend recovery may be better than what the market thinks
• ASX 200 jumps 2.4%, unloved shares keep rising
• Top brokers just upgraded these 3 ASX stocks to “buy”
• What 2020 has taught us about investing

Motley Fool contributor Brendon Lau owns shares of Evolution 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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