Shares of gold miner AngloGold Ashanti (AU 11.30%) plunged on Tuesday, falling 10.2% as of 2:36 p.m. EDT.
As a gold miner, AngloGold is essentially a leveraged bet on gold prices. And while both have soared this year, with AngloGold gaining 192% on a 58% gain in gold prices, the opposite was true today. Gold prices plunged 5.3% off record highs, the biggest one-day decline in the price of gold since 2013.
NYSE: AU
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The gold party runs out of steam
There doesn't seem to be an overriding single reason for the big sell-off in gold prices today other than perhaps profit taking based on severely overbought technical indicators.
Other theories over today's fall include an increase in the value of the dollar against which gold is priced on global markets. A strong dollar reduces the number of dollars needed to buy an ounce of gold, and a weak dollar increases the number of dollars needed.
Other reasons thrown about for the decline included an end to the seasonal Diwali gold-buying season in India, the world's second-largest gold consumer.
Still, a third reason could be the scheduled meeting between President Trump and Chinese President Xi Jinping, scheduled for next week. Tensions between the U.S. and China have reescalated over the past two weeks, perhaps a cause for the recent flight-to-safety that gold represents. Therefore, the prospect of a détente between the two countries may be leading to an unwinding of that trade.
All of these factors were likely exacerbated by the blow-off top rally seen in gold over just the past couple of months, leaving the metal vulnerable to a profit-taking sell-off.
Image source: Getty Images.
Gold flexed its characteristics this year until it didn't
As part of a diversified portfolio, gold stocks can play a role as a type of insurance against geopolitical tensions, runaway inflation, especially with regards to the U.S. and the value of the dollar, and other black swans. If investors still think those risks are lurking, the pullback in gold prices may be a good time to start thinking about adding some gold stocks to portfolios that lack exposure.
Just keep in mind that while that insurance bet has worked out well this year, gold is mainly used as a decorative metal and not in industrial production, so its inherent value is based on the whims of the crowd. Over time, productive assets such as stocks of high-quality businesses with pricing power typically outperform.
