"The 2013 Gold Crash"
"Gold gets dug out of the ground in Africa, or someplace. Then
we melt it down, dig another hole, bury it again and pay people to
stand around guarding it. It has no utility. Anyone watching from
Mars would be scratching their head." - Warren Buffett
The legendary investor is known for his antagonistic take on gold
as an investment option. But there is no denying the unmatched
popularity of the yellow metal from historical times given its
sheen and value. Investors have bought gold as a hedge against
inflation or a safeguard against the collapse of paper assets.
Gold ETFs (Exchange Traded Funds) have also become very popular
as an investment option. Gold's attributes like malleability,
resistance to corrosion or tarnishing, and shine make it ideal for
jewelry. And so long as vanity exists, can jewelry ever go out of
However, gold has lately fallen from grace as an investment
option. The words of Buffet never rang so true.
The "Golden" Days
The global financial crisis of 2008 severely hit investors'
confidence in conventional paper assets, making gold an attractive
alternative. This led gold prices soaring to an all time high of
$1,900 per ounce in Aug 2011. In 2012, gold's average market price
of $1,669 per ounce hit an all-time record high, taking advantage
of a weak dollar, lingering concerns over Europe's financial
problems, China's reduced economic growth numbers and announcement
of the third round of quantitative easing (QE3).
2013: A Nightmare Year for Gold
Highlights: Alarming Drop in April; Lowest Price in Three Years
in June and Came Close in December, Ends 2013 at around $1,200 per
2013 was an unlucky year for gold as it suffered a 28% drop, ending
the year at around $1,200 per ounce - the worst slump in more than
three decades. It was not one event that affected the gold market
in 2013. A multitude of factors - the Federal Reserve's taper or no
taper confusion, conflict in Syria and the U.S. government's
partial shutdown, and finally the taper call at year end - pushed
gold prices downhill through the year.
Gold plunged 9% in one day to $1,395 per ounce on Apr 12 - the
biggest loss in one day -- on the news that Cyprus would sell gold
from its reserves. This led investors to offload their positions.
In June, reports that the Fed was contemplating tapering its $85
billion of bond purchases sent gold prices reeling to the 2013
nadir of $1,192 per ounce on Jun 28 - the level last seen in Aug
In late August, gold prices trended higher as it regained its
status as a safe investment hedge amid fears surrounding a possible
U.S.-led military attack on Syria. As the military intervention in
Syria was avoided, traders offloaded their positions, leading to a
subsequent drop in September. The Federal Reserve's unexpected
announcement on Sep 18 that it will not taper resulted in a 5%
surge in a day on Sep 19, marking the maximum gain for the year.
However, gold prices again continued to fall during the U.S
Government shutdown. This confused gold traders as it did not drive
safe-haven bids as normally expected. Finally, the Fed's
announcement of a $10 billion cut in its monthly bond purchases on
Dec 18 prompted a huge sell-off which pushed gold prices down to
$1,105 per ounce, the strongest negative reaction for gold since
June. Gold exited 2013 at around $1,200 per ounce.
As per the latest published data from the World Gold Council, total
gold demand in the first three quarters of 2013 declined 12% to
4,373 tons, as substantial net outflow from gold ETFs offset demand
for jewelry, bars and coins. Jewelry demand soared 20% and demand
for gold bars and coins also went up 36% year over year, mainly
driven by China and India. Jewelry demand in the U.S. has been
strong over the first three quarters of 2013 after a gap of eight
years, fueled by positive signs of a recovery and lower prices.
Central banks remained the primary purchasers of gold, albeit at a
slower rate, purchasing net 297 tons in the period, accounting for
around 9% of total gold demand. On the contrary, the first three
quarters of 2013 witnessed a 697 tons net outflow from gold ETFs.
The major impact was felt in the second quarter with a record
outflow of 402 tons as gold prices fell sharply.
The difference between investors at the retail and the investment
level was never so apparent. Retail investors (in gold bars and
coins) view gold for preserving wealth and hedging against
inflation over the long term. Thus, in 2013, demand from retail
investors leaped to unprecedented levels as they saw an opportunity
to add to their holdings as gold prices dipped.
On the other hand, the institutional investors have a short-term,
speculative approach. Expectations of the U.S. government tapering
quantitative easing led to ETF investors losing confidence in gold
as a safe haven. The price drop prompted opportunistic investors to
sell their ETF holdings and shift to other investment options.
During the year, the U.S. stock market was on fire and investors
flocked to equities shunning gold.
Mine production in the first three quarters was at 2,188 tons, up
3% year over year. This is a marked improvement, as production in
2012 was restrained by labor disruptions, operational issues,
delayed project start-ups and expansions. China topped the list
followed by Dominican Republic, Brazil, Canada and Australia.
Recycling of gold contributed 1,047 tons to the total supply, 13%
lower year over year. The drop in gold prices led to a decline in
recycling activity as consumers are less inclined to part with
their stocks at lower prices. Recycling activity has declined in
the past six consecutive quarters. Overall, gold supply dipped 4%
to 3,196 tons in the first three quarters of 2013, dragged down by
lower recycling activity.
The gold companies are yet to announce their fourth quarter
results. As we delve into the September-end quarterly numbers of
the gold companies in our coverage --
Barrick Gold Corporation
Harmony Gold Mining Company Limited
Newmont Mining Corporation
Kinross Gold Corporation
Agnico Eagle Mines Limited
) -- we see earnings have taken a beating across the board due to
the decline in average realized gold prices.
The price decline added to the woes of the industry that was
already grappling with rising costs, labor issues, strikes, delays
and/or the cancellation of projects. If prices fall further,
margins will be constrained as the price of gold closes in on the
cost per ounce of the companies.
The gold miners have decided to suspend projects, curtail their
capital spending and resort to layoffs to conserve cash. The
companies are actively pursuing opportunities to optimize their
portfolio, including the divestiture of certain non-core or non
Following the sale of its oil and gas unit, Barrick Energy, and
three Australian mines last year, Barrick Gold announced its plans
to divest the Plutonic mine and Kanowna gold mine in Western
Australia over the past two months. Likewise, Newmont has entered
into a deal to sell its Midas underground operation and mill
complex in Nevada.
In Feb 2014, Goldcorp along with its joint venture partner
Barrick Gold announced that they will sell their respective stakes
in Marigold mine in Nevada. Barrick and Newmont have resorted to
dividend cuts while Kinross and Harmony Gold have suspended their
The austerity in the mining sector has led to more measured mergers
and acquisitions (M&A). Companies have slowed down M&A
deals since last year, but Chinese gold miners remained active on
the acquisition front.
To capitalize on the strong domestic demand for gold, Chinese
companies are boosting their gold resource base by acquiring
overseas as well as domestic gold mines. Lower gold prices seemed
to be the triggering force behind the deals as the companies were
able to acquire assets at discounted prices.
One surprising development came in Jan 2014 as Goldcorp announced
its plans to acquire Osisko Mining Corporation for about C$2.6
billion ($2.4 billion). Following the completion of the
construction of its key growth projects at Cerro Negro, Eleonore
and Cochenour over the next 18 months; this deal will make Goldcorp
the largest gold producer in the Eastern Canadian province.
It is clear that M&A activity in the mining industry is
expected to remain slow. Deals will come through only when
companies have enough cash to seize the opportunity to takeover
assets unloaded by peers. It remains to be seen whether Goldcorp's
takeover bid of Osisko Mining could lead to a fresh round of
M&As in an otherwise a dormant market.
Industry Ranking & Outlook - Negative
Within the Zacks Industry classification, the gold industry falls
under the broader Basic Materials sector (one of 16 Zacks sectors).
We rank all of the more than 260 industries in the 16 Zacks sectors
based on the earnings outlook for the constituent companies in each
industry. This ranking is available in the
Zacks Industry Rank
The way to align the ranking and outlook from the complete list of
Zacks Industry Rank for the 260+ companies is that the outlook for
the top one-third of the list (Zacks Industry Rank of #87 and
lower) is positive, while the outlook for the bottom one-third
(Zacks Industry Rank #174 and higher) is negative. Currently, the
gold mining industry is featured in the lowest tier with a Zacks
Industry Rank of #201, indicating a bearish outlook.
Please note that the Zacks Rank for stocks, which are at the core
of our Industry Outlook, has an impressive track record, verified
by outside auditors, to foretell stock prices, particularly over
the short term (1 to 3 months). The rank, along with
, helps to predict the probability of earnings surprises.
Performance in the Sector
In the Basic Material sector, earnings increased 2.2% in the third
quarter of 2013. We are in the final phase of the fourth quarter
earnings season. 75% of the companies in the sector have already
reported their financial results. Earnings increased 43.9% while
revenues edged up 2%. On the basis of the reported numbers, the
Basic Material sector has a beat ratio (percentage of companies
coming out with positive surprises) of 77.8%.
Q4 & Beyond
Taking into account all the companies yet to report fourth-quarter
results, earnings of the Basic Material sector are expected to
increase 20.5% in the quarter. For 2014, earnings at the sector are
expected to grow at a rate of 2.5% in Q1, then 2.1% in Q2 and 1.6%
in Q3. Overall, in 2014, the sector's earnings are projected to
grow 3%. In 2015, the growth will go up to 4.3%.
What Lies Ahead?
So far in 2014, gold prices have ranged from $1,221 per ounce to
$1,267 per ounce, averaging $1,247 per ounce to date. The Fed's
announcement on Jan 29 to reduce asset purchases by another $10
billion a month to $65 billion kept the prices in check.
However, over the last week, gold prices rose 1.9% following
dull economic numbers from the U.S. including lower manufacturing
PMI and the economy adding only 113K jobs in January, well below
expectations. Chinese buyers returned after a week-long holiday,
providing support to the prices.
Analysts continue to see rough days ahead for gold. They have cut
down their estimates for 2014, and their price expectation ranges
from as low as $1,057 per ounce to $1,292 per ounce.
The decline in prices has dealt a severe blow to investor
confidence for gold which might take many a month to restore. Even
though it has resulted in major losses in the paper gold market, it
has otherwise triggered a gold rush for the actual physical metal
in the form of bullion, jewelry, bars and coins. Thus, gold prices
will get support from retail demand for gold, particularly in India
With the tapering in the quantitative easing program set to reduce
investible surplus in consumers' hands, gold prices will remain
under pressure in 2014. Easy liquidity was the driver for increase
in gold prices over the past decade.
The positive sentiment in equity markets will lure investors from
safe haven investments like gold for the time being. Thus, the
future of gold hinges on market sentiment, the U.S economy's
progress, the Fed's policy and the demand for gold in Asia.
Admittedly investors have fled the mining sector and two things
need to happen before investors regain interest in gold mining
stocks: (1) gold price needs to rise and (2) the industry needs to
rebuild its credibility by delivering on promises of greater
shareholder returns. The consumers who rushed in to buy gold
following the fall in prices might have to wait patiently for their
anticipated returns to materialize.
BARRICK GOLD CP (ABX): Free Stock Analysis
AGNICO EAGLE (AEM): Free Stock Analysis Report
GOLDCORP INC (GG): Free Stock Analysis Report
HARMONY GOLD (HMY): Free Stock Analysis Report
KINROSS GOLD (KGC): Free Stock Analysis Report
NEWMONT MINING (NEM): Free Stock Analysis
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