Why Goldgroup Mining Tumbled Today

The Motley Fool · 1d ago

Key Points

It seems as if the U.S. Fed is willing and eager to raise interest rates.
Given the increasing possibility that this will happen, investors traded out of precious metals.
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As the trading week came to a close, precious metals were looking significantly less precious. Gold, silver, and other high-value metals declined in price amid the apparently growing possibility of a rate hike by the U.S. Federal Reserve (Fed).

With that, precious metals companies' stocks were sold off, for the most part; Exhibit A: Goldgroup Mining (NYSEMKT: GORO), which fell by nearly 4% that trading session.

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A hawkish pronouncement

Speculation of a Fed interest rate raise was rife on Friday. That morning, new(ish) Fed chair Kevin Warsh gave a speech at this year's Jackson Hole Economic Symposium. As usual with the world's most closely watched central banker, his remarks were closely monitored and scrutinized.

Image source: Getty Images.

His money quote on the day addressed the No. 1 economic fear keeping Americans up at night -- inflation. The Fed's main tool in combating this is to raise rates, with the aim of cooling price rises.

Warsh said that "We must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed. Otherwise, we have work to do."

That "work to do" part was interpreted by many (myself included) as meaning he would be hawkish on inflation if necessary. From what I see, inflation isn't set to decline meaningfully, so rate increases could very well be on the horizon. If that occurs, precious metals would be less attractive next to yield-bearing assets such as bonds.

Not at the bottom yet

So basically, the gold and silver markets are pricing in the increasing possibility of that happening. And where prices go, so go the stock prices of companies either directly or heavily involved in the mining and production of those metals. Hence, Goldgroup's Friday decline.

This isn't a favorable environment for precious metals, and I'd emphasize that they hit all-time highs in the early months of this year. I'm convinced at least one rate hike is coming, and soon, and Goldgroup and its peers will suffer from fresh drops in the prices of gold, silver, and similar commodities.

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.