After a lackluster 2013, which represented the end of the
12-year bull run for gold, the yellow metal somewhat regained its
shine in 2014. Concerns about the economy and geopolitical tensions
acted as catalysts to
which shot up to a high of $1,388 per ounce in the first quarter.
It remains to be seen whether the momentum is sustained through the
balance of 2014.
In 2013, gold suffered a 28% drop, ending at around $1,200 per
ounce -- the steepest plunge in more than three decades. It was not
one event that affected the gold market in the year. A plethora 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 down
throughout the year and tarnished its image as a safe haven asset.
A See-Saw Ride for Prices in 2014 So Far
Gold started 2014 at $1,223 per ounce and rose steadily, thanks to
the growing demand for jewelry in China, the largest consumer due
to the Lunar New Year. In mid-March, gold attained a six-month high
of $1,388 per ounce. The 13% gain since the start of the year was
stoked by Ukraine worries, fears of slowdown in China and weak U.S.
economic data that drove investors to bullion as a safe haven.
However, the bubble soon burst with gold prices again falling below
$1,300 per ounce in late March on stronger-than-expected U.S.
economic data. After see-sawing on either side of $1,300, gold
prices plummeted to around $1,250 per ounce in late May. Positive
U.S. economic indicators boosted the dollar and pushed the gold
price in the opposite direction.
Investors took the opportunity to shift from gold and flock to
the stock markets instead, sending New York indices to record
territory. Gold's safe-haven status during times of turmoil was
tarnished by the waning concerns about Ukraine. Furthermore lower
demand in China as well as India in contrast to the record levels
last year also kept prices at check.
The wipeout of a chunk of gains by the metal witnessed earlier led
to a heavy sell-off in gold stocks.
Barrick Gold Corporation
AngloGold Ashanti Ltd.
Yamana Gold, Inc.
Agnico Eagle Mines Limited
Kinross Gold Corporation
), all took a beating.
Demand Flat in Q1
As per the World Gold Council, total gold demand in the first
quarter of 2014 remained flat year over year at 1,074.5 tons, as
increase in jewelry demand was offset by lower demand in the
investment space and in the technology sector. The overall volume
of 570.7 tons was the highest first-quarter volume recorded since
Jewelry demand maintained its bullish run for the seventh
consecutive quarter. Demand went up 3% as prices fell. The advent
of the Chinese New Year, followed by Valentine's Day, led to record
first-quarter jewelry demand in China. Demand in India, however,
dipped due to the ongoing restrictions on gold imports as well as
the governmental elections. There was an uncertainty, particularly
with respect to the import curbs and whether these might be lifted.
Customers were reluctant to buy until a clear post-election picture
One of the most noteworthy developments in the quarter was in the
investment sector. Demand dipped only 2%, a marked improvement from
the substantial decline in the past few quarters. Net ETF outflows
in gold were zero in contrast with the 177 tons of outflows
witnessed in the year-ago quarter. Tensions in Ukraine made
investors flock to gold as a risk diversifier which resulted in
positive monthly inflows to ETFs in February, for the first time in
over a year, which was repeated in March. However, it was
short-lived as economic recovery in the U.S. as well as worldwide
again led to outflows.
Demand for gold bars and coins bore the brunt of the unconducive
circumstances, falling to their lowest levels for four years.
Demand plunged 39% from record levels year over year. As gold
prices steadily increased during the quarter contrary to
expectations of falling further, investors maintained a cautious
stance, awaiting a clearer price trend.
A degree of profit-taking also contributed to the year-over-year
decline. The opportunistic buying that contributed to a portion of
last year's surge resulted in some of these relatively tactical
buyers closing out of their positions as the price rose in the
course of the quarter.
Central banks remained the primary acquirers of gold, albeit at a
slower rate, purchasing net 122 tons in the period, accounting for
around 11% of total gold demand. In the technology sector, gold
demand was down 4% due to shift to other cheaper materials.
In terms of demand, 2013 was an exceptional year, which saw
consumers flooding to purchase jewelry, bars and coins as the price
went downhill. In 2014, year-on-year comparisons will be affected
by the extraordinary levels of demand that were witnessed in the
consumer space last year.
Supply Up a Meager 1% Due to Reduced Recycling
Mine production in the first quarter of 2014 was at 720.5 tons, up
6% year over year as new operations either ramped up production or
came on-stream. Canada stayed atop the leader board with
contributions from the new Detour Lake, Canadian Malartic and
Young-Davidson mines. In the Dominican Republic, production
continued to ramp up at the Pueblo Viejo mine, which came on-stream
in late 2012.
Recycling of gold contributed 322 tons to the total supply, down
13% 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. Overall, gold supply inched up 1% to
1,048.5 tons in the first quarter, dragged down by lower recycling
In the first quarter, mining companies continued to contain costs
and increase operational efficiencies. This should feed through to
continued growth in mine production in the coming quarters.
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. Gold miners have decided to
suspend projects, curtail their capital spending and resort to
employee layoffs to conserve cash. The companies are actively
pursuing opportunities to optimize their portfolio, including the
divestiture of certain non-core or non productive assets.
In line with this strategy, Barrick Gold has divested non-core
assets for a total consideration of over $1 billion since July
2013, including the sale of the Kanowna and Plutonic mines in
Australia. Goldcorp and Barrick sold their respective stakes in the
Marigold mine in Nevada. Barrick Gold's sale was part of its effort
to rid itself of some higher-cost assets, thereby reducing debt
burden. On the other hand, the sale of the mine is consistent with
Goldcorp's plan of concentrating on core assets, thereby creating
value for shareholders.
As part of its continued portfolio optimization actions,
Newmont Mining Corporation
) signed a deal to divest its Jundee underground gold mine in
Australia. The divestment underscores Newmont's strategy to focus
more on its core assets that have a longer life and lower cost.
Staying true to its objective, the company has sold its Midas mine
in Nevada to Klondex Mines Ltd. It has also sold its equity
interest in Paladin Energy Ltd. Agnico Eagle Mines recently sold
off 8.6% of the issued and outstanding common shares of Sulliden
Gold Corporation Ltd. (SUE.TO) as they were a non-core asset.
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 and lower gold prices.
This year, Agnico Eagle Mines and Yamana Gold have come together to
acquire Osisko Mining Corporation. Agnico Eagle and Yamana will
jointly acquire 100% of Osisko's issued and outstanding common
shares. The deal came after rival miner Goldcorp made another bid
to take over Osisko.
The agreement is a strategic fit for both Agnico Eagle and Yamana.
The acquisition is expected to be mutually accretive and improve
both companies' total cash cost and all-in sustaining cost
profiles. They will also get access to Canadian Malartic, the
largest producing gold mine in Canada which has the potential to
produce an average of roughly 600,000 gold ounces per year for 14
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 take over
assets unloaded by peers. It remains to be seen whether the Osisko
Mining acquisition could lead to a fresh round of M&As in an
otherwise dormant market.
Sector Q1 Earnings Scorecard - Disappointing
With all the companies in the Basic Material sector having reported
for the first quarter, the curtains have fallen on first-quarter
earnings season. Earnings decreased 2.7% in the first quarter of
2014 while revenues nudged up 0.9%. This is a marked deceleration
from the fourth quarter of 2013, in which the sector's earnings had
risen 16% while revenues had moved up 2.9%. Nevertheless, the Basic
Material sector had a beat ratio (percentage of companies coming
out with positive surprises) of 54.5%.
The earnings dip should not make investors shy away from the Basic
Material sector as the feebleness in the first quarter is
broad-based and not concentrated in any particular sector. For
further details about earnings for this sector and others, please
'Earnings Trends' report
Q2 & Beyond - Holds Promise
For 2014, earnings at the sector are expected to grow at a rate of
8.4% in the second quarter and 14.6% in the third quarter but
decelerate to a growth rate of 5.7% in the fourth quarter. Overall,
in 2014, the sector's earnings are projected to grow 9.6%. In 2015,
the growth will almost double to 18.5%.
Industry Ranking & Outlook - Positive
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 on the
Zacks Industry Rank page
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 topmost tier with a Zacks
Industry Rank of #68, indicating a bullish stance.
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 the Expected
Surprise Prediction (ESP) (Read:
Zacks Earnings ESP: A Better Way to Find Earnings
) helps in predicting the probability of earnings surprises.
So What Lies Ahead?
One of the research firms,
The Goldman Sachs Group, Inc.
), with a particularly bearish attitude on gold, expects gold price
to fall to $1,050 per ounce by the end of this year pinned down by
the easing of Chinese credit concerns and Ukraine tensions along
with stronger U.S. and Chinese economic activity. However, other
research firms feel that the yellow metal still has potential to
get its act together and forecast prices in the range of $1,250 to
Gold is expected to bounce back from the dismal lows in May as
India has slashed import duties in view of weakness in bullion
prices. India had curbed bullion imports last year, including a
record 10% duty on overseas purchases to address the high current
account deficit. Gold is the second largest import item for India
The easing of restrictions and the upcoming wedding season would
again stir up gold demand in the second largest consuming nation.
Even though strength in the U.S. and European equity markets will
distract gold investors, gold prices will get a solid thrust from
retail demand for gold, particularly in India and China.
Moreover, production pullbacks in response to lower gold prices
last year and mining development delays, could lead to a supply
crunch which would push prices higher. Additionally, the Fed is
committed to keep interest rates at lower levels for some time.
Thus, even with the tapering in place, gold might regain its shine
this year. A positive Zacks Rank and projected earnings growth for
2014 injects optimism in the so far faltering gold mining
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