FTSE 100 falls back, gold mining sector alight on $17 billion Newcrest takeover bid

“Having hit a new all-time high last Friday, the FTSE 100 opened the new trading week with a hangover, pulling back 0.6% to 7,856. Throwing cold water over the party were stronger than expected jobs figures in the US, something closely monitored by the Federal Reserve when making interest rate decisions,” says Russ Mould, Investment Director at AJ Bell.

“Ongoing strength in the labour market theoretically reduces the chances of the central bank taking its foot off the pedal when it comes to rate rises. Markets are desperate for the rate hike cycle to end, and anticipation around this pivot coming soon is a key reason why equities have done so well in the past month or so.”

Gold / Newmont / Newcrest

“The gold mining sector was alight with takeover chatter after Newmont launched a $17 billion bid for Newcrest.

“Gold had been held back until recently by US dollar strength, among other factors, but the asset and the gold mining equity sector have started to perk up for three key reasons.

“First, hopes that interest rate rises are near their peak has a direct read-across to gold. The metal has been unattractive to investors in a rising rate environment because it doesn’t offer the attraction of a yield that you get with bonds. So, if rates aren’t going up much further, gold is getting back on the radar for more people.

“Second, investors have been looking more closely at the precious metal amid expectations that the US dollar will weaken, thereby making the commodity cheaper for non-US buyers; and third, gold is often considered to be an asset that might do well in a recessionary environment.

“Adding takeover activity to the mix means gold stands to be a hot commodity once again.

“Newmont has effectively fired the starting gun on what could be a multi-party race to buy Newcrest. Any major player in the sector will have already done the maths on all the key firms, so expect to see a bidding war for the Australian company.

“Buying a rival mining company can be an easier way to expand operations than spending years on exploration looking for the next big gold deposit. At the end of the day, miners love making acquisitions and there have been far fewer deals recently among the picks and shovels brigade compared to the glory days of 2005 to 2012.

“The few that stand out are Yamana being acquired last year for $4.8 billion, the $10.6 billion merger between Agnico Eagle and Kirkland Lake Gold in 2021 and Newmont’s $10 billion acquisition of Goldcorp in 2019.”

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