Shares of gold mining stocks such as Iamgold Corp (IAG 4.65%), Gold Fields Ltd (GFI 4.07%), and Fortuna Mining Corp. (FSM 4.50%) rallied in a big way Monday, up 8.9%, 9.5%, 12.1%, respectively.
Gold prices were up 2.7% Monday after a weekend in which geopolitical tensions reignited. These include President Trump accusing China of violating its trade deal with the U.S., along with Ukraine launching a massive sneak attack on Russia's long-range bomber fleet.
Gold is often bought as a hedge against geopolitical calamity because it's perceived to be a store of value. So, when uncertainty between major global powers increases, so does the price of gold, usually. Of note, gold has been on the rise in the first few months of the Trump presidency.
NYSE: IAG
Key Data Points
U.S. and China bark, Ukraine bites
Even though the U.S. Court of International Trade (CIT) in New York ruled that the Trump administration had overstepped its authority in imposing sweeping tariffs on many countries back on April 2, the administration has sought to appeal the ruling. Furthermore, there are some tariffs the administration can still implement under non-emergency laws as another option, and the current level of tariffs will stay in place while the appeal drags on.
While trade tensions appeared to ebb over the month of May, on Friday, President Trump posted on his social media outlet Truth Social that China "HAS TOTALLY VIOLATED ITS AGREEMENT WITH US. So much for being Mr. NICE GUY!"
The fear is that a trade war with China, the world's second-biggest economy, could deeply affect the global financial system or perhaps even spill into an actual "hot" or "cold" war with China. While Congress is not likely to give President Trump wide leeway to impose tariffs on allies, there appears to be a higher likelihood it would vote to grant Trump authority to tariff China even if the court ruling remains.
In addition, while President Trump can no longer raise all the tariffs he implemented until the court appeal is decided, steel and aluminum tariffs fall under a different law. So on Friday, President Trump also decided to double steel and aluminum tariffs from 25% to 50%. That, too, affects China, which is a major supplier of steel globally and which some have accused of dumping low-priced steel on foreign markets. However, the across-the-board tariff will also limit the steel trade with close allies, such as Canada.
Any time the President threatens tariffs, especially on allies or China, gold tends to go up. That's because when the administration flexes its tariff muscle, global capital flows become less assured of the stability of the dollar and dollar-based assets, which have traditionally also been a "safe haven" in a chaotic world. But to the extent that the administration erodes confidence in U.S. stability, global investors may reallocate the portion of their safe haven assets to other places, such as gold.
Image source: Getty Images.
In addition to the renewed tariff tensions, this weekend Ukraine launched "Operation Spiderweb," a daring drone attack in which autonomous drones were smuggled deep inside Russian territory in the backs of large trucks. Ukrainian authorities have said the operation hit roughly 41 of Russia's long-range bombers, with "at least" 13 totally destroyed.
While the strike is a positive for Ukraine, it is now feared that Russia may retaliate in a disproportionate way. That uncertainty and higher risk of broader war also tends to send investors fleeing to gold. Therefore, it's no surprise to see gold rise strongly on the backs of both renewed U.S. and China trade tensions as well as Operation Spiderweb.
Gold belongs in one's portfolio -- but only as a hedge
With today's gain, gold has now appreciated 30.7% this year. However, most gold mining stocks are up even more, as you can see. This is because their profit growth will be higher than the rise in gold prices due to the leverage they achieve over their fixed costs of operations.
This profit potential is why gold mining stocks may be an even better hedge against global calamity than owning gold outright. That being said, leverage works both ways, so if the price of gold should fall a lot, these stocks would also likely fall by an even greater amount.
So, for those who own gold mining stocks, one should keep this in mind when sizing the positions as part of a diversified portfolio.
