Apparently, gold stocks lost a little bit of glimmer today as the share prices of Barrick Gold (NYSE:GOLD), Kinross Gold (NYSE:KGC) and Franco-Nevada (NYSE:FNV) fell early in the trading session. A number of contributing factors are on investors’ minds, including the potential impact of rising inflation on gold stocks.
Now, you might assume that high inflation would be positive for gold and the companies that produce it. Thus, the red-hot 9.1% Consumer Price Index (CPI) print for June should be good for Barrick, Kinross and Franco-Nevada, right?
Not necessarily. First of all, a high inflation rate doesn’t mean that the dollar isn’t strong. Actually, it is relatively strong when compared to some other world currencies. So, safety-minded investors might choose to hold U.S. dollars instead of gold during these tumultuous times.
Also, elevated inflation means that the Federal Reserve is under enormous pressure to take action. This means aggressively raising interest rates. If bond yields are high, those bonds might be more attractive than gold as a crisis hedge. After all, government bonds are seen as relatively risk-free, while gold carries downside risk.
What’s Happening With Gold Stocks?
Wherever gold prices go, gold stocks tend to follow. Furthermore, mining stocks typically magnify the movements of the spot gold price.
We’re seeing this in action today as GOLD stock slid 6%, KGC stock plunged 8% and FNV stock skidded 4% early today. This makes sense, since the drillers’ top and bottom lines will likely be impacted by lower gold prices.
As for gold itself, the yellow metal tested the $1,700 level amid the selloff. Gold topped out in March this year at around $2,000.
The next few FOMC meetings will be crucial for gold, and for mining stocks as well. Will the Fed raise interest rates by 50, 75 or 100 basis points? Or, will the central bank back off of its aggressive rate-hike trajectory? The answers to these questions will be the subject of robust debate, no doubt, and will either be bullish or bearish for gold stocks this year.
On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.