"Nothing Gold Can Stay"
Though Robert Frost's poem Nothing Gold Can Stay has a deeper
meaning in the context of nature and life, it has never been more
apt than now for the yellow metal. Frost writes that the golden hue
lasts "only so an hour." Historically, gold has been the most
desired metal given its sheen and value, but it seems to have lost
its lustre in recent times as an investment option.
Gold's attributes including malleability, resistance to corrosion
and tarnishing, and glitter makes it ideal for many jewelry
purposes. But there is more to gold; and that is the opportunity
that the metal provides for investors. 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 ETFs (Exchange-Traded Funds) have also become very popular as
an investment option. 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, labour
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 - 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 page
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 lowest tier with a Zacks
Industry Rank of #190, indicating the outlook is on the negative
side. In the past week, the industry has slipped 81 positions.
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
Expected Surprise Prediction (ESP)
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 gold producers.
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, and political or economic
The Gold Price Drama: Behind the Scenes
Highlights/Major Upheavals: Alarming Drop Witnessed in April;
Lowest Price in Three Years in June.
Drivers: Taper or No Taper, U.S.-Syrian crisis, U.S. Government
In 2012, gold's average market price of $1,669 per ounce was an
all-time record high, representing a 6% annual increase. A weak
dollar, lingering concerns about Europe's financial problems,
China's reduced economic growth and announcement of the third round
of quantitative easing (QE3) led to a surge in gold prices.
In 2013, it was not one event that affected the gold market. A
combination of factors contributed -- the Federal Reserve's taper
or no taper confusion, conflict in Syria, mine supply, Indian and
Chinese demand and the latest U.S. government imbroglio -- to
affecting gold prices. Let us have a look at the dramatic events in
detail that pushed the gold prices chart downhill through the year.
Gold prices started slipping in the first quarter of 2013 as 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
A decline in inflation level across the globe also reduced
gold's value as a hedge against rising prices. Furthermore,
anticipation that Fed's QE3 could end soon also influenced the
fall. 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.
The blow came in April with the news that Cyprus will sell gold
from its reserves as part of a European Union (EU) bailout package.
This led investors to offload their positions in gold, leading to
the 9% drop in one day to $1,395 per ounce on Apr 12 -- the biggest
loss in a day since 1983.
In June, reports that the Fed was contemplating "tapering" its $85
billion of bond purchases every month, which would begin toward the
end of this year, sent gold prices to the nadir in 2013 of $1,192
per ounce on Jun 28. This level was last seen in Aug 2010. Overall,
in the second quarter, gold prices displayed volatility and swayed
between $1,192 and $1,583.5 per ounce with an average of $1,414.8
In the third quarter, gold prices have remained in the range of
$1,212.7 to $1,419.5 per ounce. In July, gold prices remained range
bound within $1212 to $1,335, supported by a surge in demand for
jewellery, bars and coins in India and China due to lower prices.
In late August, gold prices trended higher as gold regained its
status as a safe investment hedge amid fears and uncertainty
surrounding a possible US-led military attack on Syria.
However, the sheen was short-lived as prices soon reversed its
course, dipping in September as gold's safe-haven demand waned on
expectations that military intervention in Syria could be avoided.
With Syria agreeing to hand over its chemical weapons to
international control at Russia's request, the prospects of U.S.
military attack faded. Traders who took long positions in gold on
hopes that the U.S. would attack Syria, continued to offload their
Gold's losing streak continued on speculations of the outcome of
the FOMC meeting with increased bets on Fed tapering. The Federal
Reserve turned the tables on Sep 18 at its FOMC meeting by
announcing that it will not taper the easy monetary policy. This
gave the yellow metal a fresh lease of life, leading to a buying
spree and surging $64.50 or 5% in a day on Sep 19. This marked the
maximum gain in the year so far.
Gold prices also found support on the news that former Treasury
Secretary Larry Summers has pulled out of the race to fill the Fed
chair after Bernanke steps down in Jan 2014. Summers was seen as
being in favor of scaling back the $85 billion bond buyback program
more quickly than the other candidates. With Summers out of
contention, as per latest reports, President Obama will nominate
current Federal Reserve vice-chairman Janet Yellen as chairman of
the Federal Reserve.
However, more than half of the gains were eroded as James Bullard,
chief executive officer and president of the Federal Reserve Bank
of St. Louis, said that the Fed could consider a small taper at its
next meeting in October if it is backed with strong economic data.
This prompted a wave of selling in gold.
Amid all this, the most dramatic development was the U.S
government's partial shutdown from Oct 1. The shutdown, the first
one in 17 years, resulted from the Congress failing to pass a
budget before the start of the financial year on Oct 1 due to an
intense power struggle over President Obama's health care law aimed
at extending insurance to millions without coverage.
Gold incurred a significant loss to close at below $1,300 per
ounce, a seven-week low based on the expectation that it will be a
temporary disruption. This confused gold traders as the shutdown
did not drive safe-haven bids for the metal as normally expected.
The tussle between the U.S. political parties over the budget
raises concerns that the government may default on its debt.
Possibilities to increase the $16.7 trillion debt ceiling would be
discussed on Oct 17.
However, Treasury Secretary Jack Lew warned that the United
States will run out of its ability to borrow money on Oct 17, and
with a cash position of only $30 billion and obligations that can
run to $60 billion a day, it will put the nation at a risk of
sovereign debt default. This unprecedented event is most likely to
have catastrophic consequences on the U.S. economy and other parts
of the world.
Gold prices firmed higher the next day as uncertainties surrounding
the debt ceiling lured traders back to the metal. Furthermore,
lower-than-expected private-sector job report drove the gold prices
higher as the dollar slumped against rival currencies amid budget
woes. However, gold ended in red last week as the U.S. dollar
bounced from an eight-month low logged a day earlier.
The U.S. Labor Department delayed its jobs report for the last
month, originally scheduled for release on Friday, as the shutdown
entered its fourth day. Furthermore, gold demand was affected
during the week due to week-long national holiday in China.
All eyes will now be on Oct 17, the crucial day for lifting the
U.S. debt ceiling. Focus will also be on the FOMC meeting,
scheduled for Oct 29-30, on whether Fed would consider a small
What Lies Ahead
To date gold has dipped 24% from its all-time high in Sept 2011
when it touched $1,921 per ounce. This drop has technically put the
yellow metal into the quagmire of a bear market.
Analysts continue to see rough days ahead for gold. They have cut
down their estimates for 2013 as well as for 2014, and their price
expectation ranges from as low as $1,000 per ounce to $1446 in
2013. For 2014, the scenario is not expected to improve much with
price expectations lying between $1050 and $1435.
The U.S. government was last shutdown 17 years ago from Dec 16,
1995 to Jan 6, 1996. A look at the then price chart reveals a rise
in gold prices from about $387 to $396 during the closure period.
However, this might not be the case this time as the other factors
influencing the gold price are different.
The recent decline in prices has dealt a severe blow to investors'
confidence for the yellow metal and it 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 get support from retail demand for gold,
particularly in India and China. Gold traders are eyeing an
increase in physical demand from Asia, particularly from India due
to the upcoming festive demand.
The stalemate situation in Washington with no immediate solution in
sight, delay in U.S. economic data due to the suspension of Federal
government services and debt woes will impact gold prices. A
prolonged shutdown (already entered the ninth day) will have a
negative effect on the U.S. GDP and may delay Fed's tapering
decision, which will act in favor of gold.
Furthermore, the nomination of Janet Yellen, the key architect of
the stimulus program along with Bernanke, will bring back
confidence in the market, if confirmed by the Senate. Yellen has
been a strong supporter of easy monetary policy and it is expected
that she will not bring major changes to Fed's policies in this
turbulent times. This will improve investor sentiment and might
support gold prices.
Total gold demand stood at 856 tons in the second quarter of 2013,
down 12% as substantial net outflow from gold ETFs offset record
investment in gold bars and coins.
Jewelry demand soared to 575 tons in the quarter, the highest level
for five years and up 37% year over year catapulted by lower price
levels. Despite the lower prices, demand in value terms surged 20%
to $21.8 billion, which is the fourth highest on record. The trend
had picked up from the first quarter of 2013 and India and China
(60% of the global jewelry demand) continued to be at the forefront
with respective annual growth of 51% and 54%, respectively.
In India and China, a growing middle class, inflation expectations
triggered the demand in order to capitalize on the low prices and
expectations of an increase in the future. Particularly, in China,
the poorly performing stock market, concerns over the possibility
of a domestic credit crisis and economic slowdown also helped the
Markets improved in other parts of the world as well, particularly
in the U.S. U.S. delivered yet another quarter of growth. In the
first quarter, jewellery demand has increased after a hiatus of
seven years, fueled by positive signs of the 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. However, Europe was the only exception - not a surprise
given the uncertain economic scenario in the region.
Demand for gold bars and coins stood at 508 tons, up 78% year over
year. Demand topped the 500 ton benchmark in a quarter for the
first time driven by China and India. Overall, global consumer
demand for gold (jewelry and bar and coin) surged 53% year over
year to 1,083 tons in the quarter.
Technology demand was stable at 104 tons, edging up 1% year over
year. Growth in electronics and other industrial and decorative
purpose was partially offset by continued decline in dental demand
due to shift toward more affordable alternatives.
Central banks remained the primary purchasers of gold, completing
their tenth consecutive quarter of net purchases, accounting for
around 8% of total gold demand at 71 tons. The purchasing has,
however, declined from 109.7 tons in the first quarter and 164.5
tons in the prior-year quarter; reflecting the volatile price
movements during the quarter, weakness in emerging market
currencies and the declining rate of growth in foreign exchange
reserves among some banks.
On the contrary, the quarter witnessed a record 402.2 tons net
outflow from gold ETFs. This led to overall investment demand
decline of 63%. The bridge between investors at the retail level
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 the second
quarter, demand from retail investors leaped to unprecedented
levels 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. Expectations of
the US government tapering quantitative easing by the end of 2013
led to ETF investors losing confidence in gold as a safe haven. The
price drop in the quarter prompted these opportunistic investors to
sell their ETF holdings and shift to other investment options.
The official sector and emerging markets remain the long-term
drivers of demand for gold. Following the recession in 2008, gold
investment in Europe and the US was reinvigorated. However, the two
Asian giants -- China and India -- will dominate the consumer
demand for gold over the next few quarters. This marks a
geographical shift from West to East.
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 second quarter, mine production was at 732 tons, up 4% year
over year led by expansion in a number of small- to medium-sized
operations in China. Production increased in the Dominican Republic
Barrick Gold Corp's
) Pueblo Viejo mine and in Brazil.
Indonesia, Peru and Ghana were the regions that witnessed decline
in mine production. Even though the impact of price changes on mine
production has been slow historically, the steep drop in the second
quarter has led to knee-jerk reactions among gold producers.
Spending cuts and the closure of cost-intensive operations may
impact the supply pipeline by the end of this year.
Over the last five years, recycling has generated around 40% of
total supply. Supply from this sector is highly price sensitive.
Drop in gold prices led to a decline in recycling activity as
consumers are less inclined to part with their stocks at lower
Recycling of gold contributed 308.3 tons to total supply in the
second quarter, 21% lower year over year, the fifth consecutive
quarter of annual decline. Overall, gold supply dipped 6% to
1,025.5 tons, dragged down by lower recycling activity.
Performance of Gold Companies
As we delve into the June-end quarterly numbers of the gold
companies in our coverage - Barrick Gold Corporation,
Harmony Gold Mining Co.Ltd
Newmont Mining Corp.
Kinross Gold Corp.
Agnico Eagle Mines Ltd
), we see earnings have taken a beating across the board due to the
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 Jun-Aug 2013
timeframe driven by the low gold prices, second quarter results and
Furthermore, the companies are also riddled with their individual
operational issues. Barrick's stock had fallen under pressure
following the 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 concerns.
However, in September, the Supreme Court of Chile issued a ruling
which upheld the environmental approval for the Pascua-Lama project
The Pascua-Lama mine, located at the Chile-Argentina border, is
one of the world's largest gold and silver resources with nearly 18
million ounces of proven and probable gold reserves, and an
anticipated mine life of 25 years. Barrick incurred $5.1 billion in
asset impairment charges against the carrying value of the
Pascua-Lama project in the second quarter.
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 cut costs.
If prices fall further, margins will be constrained as the price of
gold closes in on the cost per ounce of the companies. Analysing
the all-in sustaining costs (total costs associated with producing
gold), 2013 guidance of Barrick Gold, Newmont, Kinross, Goldcorp,
) ranges from $900 to a maximum of $1250 per ounce. If prices fall
beyond the lowest level of $1192, recorded in June, it will erode
the margins of these companies.
The Survival Tactics
Barrick, Harmony, Goldcorp, Newmont, Kinross, Agnico-Eagle have
decided to curtail their capital spending for the year. Barrick
Gold has hived off its oil and gas unit, Barrick Energy, and three
of its Australian mines to offload underperforming assets.
Goldcorp postponed non-essential infrastructure and non-critical
path activities at Cerro Negro project, Argentina, until 2014 and
2015, respectively, owing to lower metals prices.
Kinross does not expect to make a decision now on whether to
proceed with a potential Tasiast mill expansion until 2015 at the
earliest, regardless of the project feasibility study outcome. The
study is expected to complete in the first quarter of 2014. The
decision was part of the company's focus on capital reduction in
the current lower gold price environment.
IAMGOLD announced that its joint venture with
AngloGold Ashanti Ltd.
) and the government of Mali will suspend mining excavation
activities at the Yatela mine in Mali, effective Sep 30, 2013. The
decision was triggered by rising costs and falling gold prices,
which made it extremely difficult to extend the mine's life.
Moreover, the mine has been also viewed as no longer capable of
making a positive contribution to any of its stakeholders.
Both IAMGOLD and AngloGold Ashanti hold a 40% stake in the mine.
Newmont has signed a letter of intent to divest its Midas operation
in Nevada to focus more on its core businesses by disposing its
non-core assets. Barrick is reportedly considering a joint venture
with Newmont in Nevada to explore means to cut costs.
Barrick reduced the quarterly dividend by 75% to 5 cents per share
in order to improve liquidity. Newmont's board announced third
quarter gold-price-linked dividend of 25 cents per share that is
based on the average London P.M. Gold Fix. It reflects a 10 cents
drop compared with the prior quarter. Kinross' board of directors
suspended the semi-annual dividend in order to reduce its operating
and capital costs.
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. Once all expenses are
reduced to the bone, the only way to survive will be to reduce
their expenses by reducing operations. They will be compelled to
either shut down or sell mines with the highest operating costs.
The eventual decrease in supply may inflate the price of the yellow
metal. If prices do not rise in the next 12 months, the miners will
need to drastically cut production in order to conserve cash.
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.
The austerity in the mining sector has led to more measured mergers
and acquisitions (M&A) activity. 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 enhancing
their gold resource base by acquiring overseas as well as domestic
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 Minerals. Australia was a preferred target
considering it is the world's second-largest gold producer after
China. In China, one deal worth mentioning was of Shandong Gold
Mining buying Shandong Shengda Mining for $590 million in Jun 2012.
Lower gold prices seemed to be the triggering force behind the few
deals in the first half of 2013, as the companies were able to
acquire assets at discounted prices. In May 2013, Shenzhen-listed
Shandong Qixing Iron Co. agreed to a conditional $140 million deal
to acquire the assets of Australia-listed Stonewall Resources
The largest deal in the gold sector in the first half of 2013
was the sale of Mikhail Prokhorov's 37.8% stake in Polyus Gold
International Ltd. for $3.6 billion. Another notable deal in the
first half of the year was
Hecla Mining Co.'s
) acquisition of Aurizon Mines Ltd. for $775 million. In August,
New Gold, Inc.
) took over 86% of exploration company Rainy River Resources Ltd.
in a deal valued at about $310 million.
It is clear that for the balance of 2013 and in 2014, 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 the assets unloaded by peers in the cost
cutting environment. Gold is expected to remain the top commodity
for acquisitions in the months ahead and the successful deals will
help to shape the future of the mining industry and to determine
its key players.
Earnings Performance in 3Q13 and 2Q13
We are still a couple of weeks away from getting into midst of
third quarter earnings season. Only 4.2% of the companies in the
basic material sector have reported to date. Earnings increased
3.5%, accelerating from the 2% growth recorded in the second
quarter by these companies. Revenues went up 4.4%, faring much
better than the 0.7% growth in the second quarter. Even though
results are tracking better than the previous quarter, it is too
early to rejoice.
Looking back at the overall results of the Basic Material Sector in
the second quarter, earnings dipped 10.9% in the second quarter of
2013, deteriorating from the 1.6% decline in earnings witnessed in
the first quarter of 2013. However, revenues for the sector went
down 1.4% in the second quarter, worsening from the flat sales in
the first quarter.
Of the companies reported, the Basic Material sector had a beat
ratio (percentage of companies coming out with positive surprises)
of 0.0%, compared with 100% in the first quarter.
Expectations for 2013 & 2014
The Basic Material sector is one of the sectors experiencing
material negative estimate revisions. However, the overall
projection of a 5.0% dip in the third quarter paints a somewhat
better picture when compared with the 10.9% drop experienced in the
second quarter. The sector is expected to return to growth with a
10.8% increase in earnings in the fourth quarter of 2013. Revenues
are expected to rise 0.7% in the third quarter and 2.1% in the
In the first quarter of 2014, the sector's earnings are expected to
rise 11.9% in the first quarter of 2014 despite a rise of a meager
3.3% in revenues. In the second quarter of 2014, earnings are
projected to surge 21.9% while revenue is expected to increase by
In 2013, the sector's earnings is expected to edge up 0.1% while
revenues are expected to grow 0.7%. In 2014, earnings growth is
projected at 17.9% and revenues at 4.2%.
To Sum Up
Demand for gold will undoubtedly continue to rise in the long term,
thanks to the rising middle class in India, China 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 are currently at unprecedented levels. It may,
however, take months for this new demand to feed into prices, but
prices will eventually stabilize.
Investors have fled the mining sector and two things need to happen
before investors regain interest in gold mining stocks: gold price
needs to rise and the industry needs to rebuild its credibility by
delivering on promises of greater shareholder returns. The
consumers who rushed to buy gold following the fall in prices might
have to wait patiently for their anticipated returns to
Meanwhile, it remains to be seen how the political turmoil and debt
crisis in the U.S. turns out, which will have its effect on the
yellow metal. 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
ANGLOGOLD LTD (AU): Free Stock Analysis Report
GOLDCORP INC (GG): Free Stock Analysis Report
HECLA MINING (HL): Free Stock Analysis Report
HARMONY GOLD (HMY): Free Stock Analysis Report
KINROSS GOLD (KGC): Free Stock Analysis Report
NEWMONT MINING (NEM): Free Stock Analysis
NEW GOLD INC (NGD): Free Stock Analysis Report
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