Why Goldgroup Mining Stock Popped, Then Dropped
Key Points
The U.S. Federal Reserve raised interest rates for the first time in three years yesterday.
The new target interest rate of 4% makes savings relatively more attractive than gold.
Gold prices fell yesterday, but are rising again today.
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Goldgroup Mining (NYSEMKT: GORO) stock jumped more than 6% in early trading Thursday before retreating to just a 0.6% gain as of 11:11 a.m. ET. The stock bounced back from a sell-off yesterday, after the U.S. Federal Reserve raised interest rates yesterday for the first time in three years.
But already, investors seem to be rethinking that move.
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What happened Wednesday -- and what it means for gold prices
Federal Reserve Chairman Kevin Warsh says "inflation is too high and has been for too long." To fix that, the Fed will raise interest rates by 0.25%. The new range, 3.75% to 4%, means mortgages are about to become more expensive, credit card interest rates will rise, and bond yields will go up.
This gives savers slightly more incentive to put money in bonds and bank accounts (which pay interest) than invest in gold (which does not). Gold sold off yesterday, falling to $4,333 per ounce -- its lowest price in a month. It bounced this morning, but the bounce is already fading, and the shiny metal is currently up only 0.2% at $4,397 an ounce.
What's next for Goldgroup Mining stock
Where will gold prices go next? Logically, with interest rates likely to keep rising (to combat inflation), gold prices should resume falling. (And as today's price rally fades, that may already be happening.) But it's really hard to predict.
And here's the problem with Goldgroup stock: If gold prices do fall, the company's not in a great financial position to deal with that. One of the smallest gold miner stocks, Goldgroup has lost money for five straight years. Analysts polled by S&P Global Market Intelligence think it might earn a profit this year, but falling gold prices could derail that prediction.
Investors are probably better off investing elsewhere.
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Rich Smith 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.
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