Shares in popular gold miner Newcrest Mining Limited (ASX: NCM) are bucking the trend this morning trading up by more than 3%. But, its big payday might require an economic meltdown.
Newcrest engages in the exploration and mining of gold. It is Australia’s leading gold mining company with its most prominent Australian mines being located in the Pilbara region of Western Australia and just south of Orange in rural New South Wales. The company also operates a number of mines outside of Australia including in Papua New Guinea, Indonesia and Ivory Coast
Defying The Market
The ASX (INDEXASX: XJO) plunged more than 100 points lower upon opening this morning and has continued to drift south to be down by as much as 160 points, or 2.5%.
There has been no news out of the company that would explain why Newcrest shares have run counter to the rest of the market. The reason for the price action is likely the simple fact that gold miners have a tendency to outperform, at least relative to other ASX shares, when financial markets are jolted by sudden negativity.
This is sometimes referred to as a flight to safety. Gold is seen by many as a ‘safe haven’ asset. As a result, the price of the precious metal tends to rise during times of significant economic turmoil or uncertainty. This will typically boost the share prices of those companies whom are in the business of exploring for, mining or selling the shiny commodity.
Doomsday Warning
There is an argument to suggest that artificially low interest rates along with unprecedented government debt and mass money printing by central banks around the world could eventually collapse major world currencies.
In such a catastrophic scenario, one may argue that we could see a return to “real money” or money that is at least partially backed by real assets, such as what we had before abandoning the gold standard completely in 1973.
When considering the likely options in such a scenario, gold is an obvious choice given it has previously served such a function as little as a few decades ago.
It’s easy to imagine the Newcrest share price trading exponentially higher under these drastic circumstances.
Don’t Get Out Your Tin Foil Hat Just Yet
I should point out that the above scenario is very unlikely and I am certainly not predicting that it will come to fruition anytime soon. It might be prudent, however, to think about having a small exposure to gold within your portfolio as part of a wider diversification strategy.
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At the time of publishing, Luke has no financial interest in any companies mentioned.
