Tale of Gold: What Has, Is and Will Happen
Gold may have lost the battle to diamonds in becoming a girl's best
friend, but the yellow precious metal can very well qualify as
historically the most desirable metal. The attributes including
malleability, resistance to corrosion and tarnishing, and the
glitter makes it ideal for many jewelry purposes. But there is more
to Gold; and that is the opportunity that the metal provides for
Gold investors buy gold bullion, official coins as a hedge against
inflation or a safeguard against the collapse of paper assets such
as stocks, bonds and other financial instruments. Gold
(Exchange-Traded Funds) have also become very popular as an
Gold ETFs are units representing physical gold, which may be in
paper or dematerialized form and are traded on the exchange like a
single stock of any company. Governments, central banks and other
official institutions hold significant quantities of gold as a
component of exchange reserves.
Gold Mining Industry - A Brief Overview
Gold exploration and mining is a time consuming and expensive
endeavor. Given its scarcity and remote location of deposits,
exploration for new gold deposits is difficult. Once an
economically viable deposit is identified, bringing a mine on line
can take a decade or more, and it requires substantial capital
Moreover, the mining industry is subject to several risks and
hazards such as political conflicts, environmental hazards,
industrial accidents, unexpected geological conditions, labor force
disruptions, unavailability of materials and equipment, weather
conditions, pit wall failures, rock bursts, cave-ins, flooding,
seismic activity and water conditions. However, once the mine
development project is successful, returns can be enormously high,
which more than offsets the risks and the capital invested.
Industry Ranking & Outlook
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 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 featuring in the bottom 1/3rd with a Zacks
Industry Rank of #251, indicating the outlook is on the 'Negative'
Please note that the Zacks Rank for stocks, which is at the core of
our Industry Outlook, has an impressive track record going back
years, verified by outside auditors, to foretell stock prices,
particularly over the short term (1 to 3 months). The rank along
with Expected Surprise Prediction (ESP) (Read:
Zacks Earnings ESP: A Better Method
) helps in predicting the probability of earnings surprises.
There is a lot of buzz in recent days surrounding gold prices.
Let's look at the driving factors, recent trends and the road
What affects gold prices?
Gold prices fluctuate on a daily basis and are influenced by
industrial and jewelry demand, demand for gold as an investment,
central bank lending, sales and purchase of gold, volume of
recycled material available in the market, speculative trading; and
costs and levels of global gold production by producers of gold.
There are a number of economic factors as well that influence gold
prices. Over the past few years, the price of gold has shown a high
inverse correlation with the U.S. dollar. In the wake of dollar
weakness, investors opt for gold as a safe haven. Other factors
include expectations of the future rate of inflation, interest
rates; and global or regional, political or economic uncertainties.
Recent Price Trends: Alarming Drop Witnessed in April and
In 2012, gold's average market price of $1,669 per ounce was an
all-time record high, representing a 6% annual increase. Lingering
concerns about Europe's financial problems, China's reduced
economic growth, announcement of the third round of quantitative
easing (QE3) led to a surge in gold prices.
In the first quarter of 2013, gold prices ranged from $1,574 per
ounce to $1693.75 per ounce, with average gold price at $1,631.8
per ounce, down 3% year over year. However, gold prices slumped
drastically subsequent to the first quarter.
On Apr 12, prices dipped 9% in 1 day from $1,535.50 to $1,395
per ounce, a level last witnessed in Feb 2011. After a short-term
correction, the price dipped to the lowest level in 2013 of
$1,354.75 on May 20.
Year to date, gold prices have fallen 18%. This steep drop has
technically put the yellow metal in a bear phase, leading to
widespread concerns and questions such as -- why gold is going
down, whether it will last, and whether it can still be termed as a
Why is the sheen wearing off?
It was not a day's event that affected the gold market, but the
unfavorable factors had been building up over the past few months.
The U.S economy started showing signs of a revival. As mentioned
earlier, the strengthening of the US dollar has an inverse
relationship with gold prices. Monetary easing in Japan led to
dollar's strength, thus proving the theory.
A decline in inflation level across the globe also reduced gold's
value as a hedge against rising prices. Furthermore, anticipation
that U.S Fed's QE3 could end soon also influenced the fall.
Rising interest rates make bonds more attractive than gold. The
final straw was the news that Cyprus may sell gold from its
reserves. This led investors to offload their positions in gold.
What Lies Ahead
Analysts continue to see rough days ahead for gold. They have cut
down their estimates for 2013 as well as 2014, citing mounting
headwinds from a strengthening dollar, improving U.S. growth,
rising interest rates, subdued inflation and lack of investment
buying. However, they expect prices to remain above 1,500 per ounce
The recent plummet in prices has dealt a severe blow to investor
confidence for the yellow metal. This may take many months 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 at least become stable if not move higher as
retail demand for gold lends support, particularly in India and
Total gold demand stood at 963 tons in first quarter 2013, down 13%
as substantial net outflow from gold ETFs offset growth in consumer
demand for gold and from central banks. Technology demand was down
due to weak consumer demand, uncertainty in Europe and substitution
to more affordable alternatives.
Jewelry demand soared to 551 tons in the quarter, helped by lower
price levels. Even though India and China (62% of the global
jewelry demand) were at the forefront with respective annual growth
of 15% and 19%, respectively, other markets also improved,
particularly the U.S.
In India, a good spring harvest and lower prices ahead of the
wedding season triggered the increase. In China, festive buying for
the Chinese New Year and regained confidence in China's economy led
to a record quarter.
The surprise package in the quarter was U.S with jewelry demand
increasing after a hiatus of seven years, fueled by positive signs
of U.S recovery and lower prices. Demand had been low due to weak
consumer sentiment against a backdrop of high unemployment, falling
real wages and rising gold prices. Demand for gold bars and coins
stood at 378 tons, well above the five-year quarterly average,
fueled by demand from India, China and the US.
Central banks remained the primary purchasers of gold, accounting
for around 11% of total gold demand at 109.2 tons. Demand topped
the 100 ton mark for the seventh consecutive quarter, a testament
to the fact that central banks continue to favor gold's
diversification benefit as they reduce their portfolio allocations
to US dollars and euros.
On the contrary, the quarter witnessed a 176.9 tons net outflow
from gold ETFs. This led to overall investment demand decline of
49%. This performance brings to light the conflict in behavior of
investors at the retail level and the investment level.
Retail investors (in gold bars and coins) view gold for
preserving wealth and hedging against inflation over the long term.
Thus, in the first quarter, demand from retail investors remained
high as they saw an opportunity to add to their holdings as gold
On the other hand, the institutional investors have a different
perception with a short term, speculative approach. The price drop
in the quarter prompted these opportunistic investors to sell their
ETF holdings and shift to other investment options.
Gold-backed ETFs have seen outflows of 350 tons out of a total of
2,700 tons held in 2013 till April end. Further price pressure
could lead to continued outflow in the near term. On the contrary,
bar and coin demand has leaped to unprecedented levels.
This phenomenon is not constrained to Asian markets only. In the
US, total number of American Eagle coins sold in April recorded the
highest ever dollar value of $311 million. The UK mint reported a
tripling of coin sales in April, and the Perth mint in Australia
reported the highest demand levels in five years.
With buyers flocking the gold retail stores, several key markets
have reportedly run out of stock, particularly in China and India.
In April and May, India imported around 300 tons, nearly twice the
However, to rein in the surging demand, India has increased the
duty on gold imports. Nonetheless, this increase in the import duty
is unlikely to impact imports, as consumer demand remains at very
The World Gold council expects 300-400 tons of gold to be
imported into India during the second quarter, a 200% annual climb.
China, another major consumer, is not far behind as imports from
Hong Kong are also reported at high levels.
The official sector is expected to continue to be the net buyer of
gold. Gold will also enjoy demand from industrial and technology
companies for a wide range of products.
A combination of current mine production, recycling and draw-down
of existing gold stocks held by governments, financial
institutions, industrial organizations and private individuals,
constitute the annual gold supply.
In the first quarter, mine production was at 688 tons, up 4% year
over year and 2% above the five-year quarterly average of 671.9
tons. Production increased in the Dominican Republic fueled by
Barrick Gold Corporation's
) Pueblo Viejo mine and in China. Growth was also noted across
several mines in Canada and Brazil.
) Penasquito mine continued to ramp up production in Mexico.
Recycling of gold contributed 366.6 tons to total supply in the
first quarter, 4% lower year over year, the fourth consecutive
quarter of annual decline. This was due to reduction in the
available supply of gold and economic factors. Overall, gold supply
increased a meager 1% to 1,051.6 tons.
Performance of Gold Companies
As we delve into the March-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
) and Goldcorp, we see earnings being hampered across the board by
decline in average realized gold prices.
Shares of Newmont, Barrick Gold, Kinross, Goldcorp, Agnico Eagle
and Harmony Gold hit their 52-week lows in the April-May timeframe
driven by the sudden drop in gold prices, first quarter results and
trimmed guidance. Furthermore, the companies are also riddled with
their individual operational issues. Barrick's stock has fallen
under pressure since the April 10th announcement that the company
is suspending construction at its Pascua-Lama mine in Chile, in
response to a court order from a Chilean court citing environmental
The price decline added to the woes of the industry that is already
grappling with rising costs, labor issues, strikes, delays and/or
the cancellation of projects. This has put gold miners on the
defensive, forcing them to reassessing and cutting costs. Companies
like Barrick and Agnico-Eagle have trimmed down their cash cost
guidance for 2013 in order to remain profitable.
If prices fall further, margins will be constrained as the price of
gold closes in on the cost per ounce of the companies. Analyzing
the all-in sustaining costs (total costs associated with producing
gold), 2013 guidance of Barrick Gold, Newmont, Kinross, Goldcorp
and Agnico Eagle ranges from $950 to a maximum of $1200 per
Even if prices continue at April/May levels, there is still a
chance for these companies to earn profits. On the other hand,
) is running at a risk with consolidated total all-in sustaining
cost guidance of $1,200 - $1,300, which is quite close to the
Barrick, Harmony, Goldcorp, Newmont have decided to curtail their
capital spending for the year. According to reports, Barrick Gold
is contemplating to sell three of its Australian mines and its oil
and gas unit -- Barrick Energy and Kabanga, its 50% owned nickel
project in Tanzania to offload underperforming assets.
The key to stay afloat in these turbulent times is to identify and
reduce discretionary expenses wherever possible, trim capital
spending, defer new capital development programs, divest
underperforming assets and cut dividends. The companies should
judiciously proceed on only low-risk, high-return brownfield and
the best Greenfield projects.
In the falling gold price environment, companies with major
projects may require additional debt to complete them. Miners with
lower costs, lower levels of debt, and with recently completed new
mine development will be able to sustain themselves.
Companies have slowed down their deal activities 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 acquiring overseas gold mines. In 2012, China's
second largest producer, Zijin Mining Group, bought Australia-based
Norton Gold Fields and the third largest gold producer, Shandong
Gold Group, acquired majority stake in Australia's Focus
Australia was a preferred target considering it is the world's
second-largest gold producer, after China. Hong Kong-listed
Kingwell Group Limited recently made an offer to Canada-based
Brazilian Gold Corporation to acquire not less than 50.95% of its
share. Brazilian Gold focuses on the acquisition, exploration and
development of gold properties located in northern Brazil.
To Sum Up
Demand for gold will undoubtedly continue to rise, thanks to the
rising middle class in India, China, Latin America and other
emerging markets. The Euro-zone debt crisis will also be an
important driver for gold demand. Furthermore, demand for gold
bullion and coins is currently at an unprecedented level. It may
however take months for this new demand to feed into prices, but
prices will eventually stabilize.
According to the World Gold Council, the bull market for the yellow
metal is very much intact even if there's a lot of uncertainty at
the moment for investors. Gold is expected to return to pre-April
levels as the long-term drivers of demand are firmly in place.
The consumers who rushed to buy gold following the fall in prices
might have to wait patiently for their anticipated returns to
materialize. At current levels, one should invest in gold as a
long-term investment, which will grow in value and add
diversification to a portfolio. For quick returns, it is advisable
to focus on other assets.
BARRICK GOLD CP (ABX): Free Stock Analysis
AGNICO EAGLE (AEM): Free Stock Analysis Report
GOLDCORP INC (GG): Free Stock Analysis Report
NEWMONT MINING (NEM): Free Stock Analysis
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