What's Going On With Gold and Gold Stocks?
If you are a gold bug the past three and a half months have not been good. Since peaking at $1,798.05 on October 4th, 2012, the price of gold has been losing ground and closed on Friday at $1,657.85. This marks a 7.8% loss in less than four months.
Meanwhile, the major equity markets have caught fire - over the same period the DJIA has climbed from 13,575.36 to 13,895.98, a gain of 2.26%. The US dollar has also performed well recently further adding to gold's woes.
Gold stocks, one might think, would be performing better than gold given that confidence in the equity markets is back in full force. Not so. Since October 4th last year, the S&P/TSX Global Gold Index has seen its value drop from 352.50 to 280.59 - a whopping loss of 21.4%.
To paraphrase legendary soul singer Marvin Gaye, what's going on... with gold and gold stocks?
The current factors facing gold stocks.
Historically, investors have been able to leverage the price of gold by investing in gold stocks. Unfortunately, the same math applies on the downside.
In addition, some believe that gold mining companies are simply not able to replace production at the same cost as mines are depleted. If these deposits are replaced by lower grade ore, then profits and cash flows will be lower due to higher production costs - particularly if the price of gold does not continue to rise. Under this scenario, the "leverage effect" of a particular gold producer would decline proportionally over time.
The MiningFeeds Gold Stock Index is currently at 1,624.48. The index was launched on April 1, 2012 at 1,000 and features a weighted average market cap index of publicly traded gold companies - CLICK HERE - for that list. After reaching a high of 2,020.42 in early October, 2012 the index hit a low in November of 1,604.68. Keep a close eye on this key support level in the coming days and weeks.
The current factors affecting the price of gold.
Let's first look at the CNN Money Fear & Greed Index. The index is calculated using 7 key indicators (Stock Price Movement, Stock Price Strength, Stock Price Breadth, Put and Call Options, Junk Bond Demand, Market Volatility - VIX, and Safe Haven Demand). For each indicator, the index looks at how far they've veered from their average relative to how far they normally veer. The index scale is from 0 to 100 and the higher the reading the greedier investors are being (50 is neutral). Currently, the index is at 94 representing "extreme greed" and the highest ranking reached in the past 3 years.
Extreme investor greed reflects the "risk on" appetite in the markets today. “It’s a pretty simple situation at the moment. Sentiment towards the global economy, with the UK being the lone exception today, has turned manifestly bullish. In this environment, gold and silver become less attractive as investors would rather jump on board the rally in equities – that’s where the action is,” according to one US-based fund manager.
On Wednesday, the House of Representatives agreed to kick the debt ceiling can down the road for a few months. In order to do so, the House voted on legislation that will raise the debt ceiling for three months and delay a US default. According to Republican House member John Fleming, “We feel by moving the issue of raising the debt ceiling behind the sequestration … that we reorder things in a way that Democrats will have to work with.” The news further sparked the equity markets and ignited a sell-off in gold.
The legislation contains a “no budget, no pay” segment meaning the House and Senate members will no longer receive their paychecks if a budget is not in place by April 15. The debt ceiling is now on the back burner until perhaps mid-May. Some anticipate the US Congress will ultimately raise the debt ceiling from $16.4 trillion to $18.8 trillion; however, this move is now clearly dependent on the upcoming budget.
The price movement in gold has exhibited an interesting correlation with the debt ceiling in the US. In March 2008, gold broke through the $1,000 level. A few months later, the debt ceiling was raised to above $10 trillion. In November 2010, gold reached $1,400 an ounce only a few months after the debt ceiling was raised to more than $14 trillion. Perhaps it's no coincidence that gold is currently trading at $1,657.85?
On Thursday Morgan Stanley cut its estimates for gold in 2013 by 4% to $1,773 an ounce. The bank said, "We remain bullish on the gold price outlook in 2013 despite recent selling pressure triggered by market concerns of an earlier than previously anticipated tightening in U.S. monetary policy."
Gold stock news and notes this week.
This week was not all negative for the gold sector - a few gold miners announced key milestones and the analysts were weighing in as well.
Abzu Gold (Stock Profile - TSX-V:ABS) announced the commencement of a 5,000 meter drill program at its flagship Nangodi gold project in Ghana. The announcement comes on the heels of closing a $2.5 million unit financing at $0.11 with strategic partner Stonehouse Construction. Shares of Abzu Gold are currently trading at $0.08.
Atico Mining (Stock Profile - TSX-V:ATY) reported results from seven drill holes for their El Roble mine project in Columbia including 119 meters of 6.9% copper and 6.3 grams per tonne gold. The company's stock rallied this week up 42% to close at $0.98 on volume of 3.78 million shares.
AuRico Gold (Stock Profile - TSX:AUQ & NYSE:AUQ) announced the completion of their $300 million share buyback program. Raymond James analyst Gary Baschuk updated his target price to $8.75 per share (down from $9.00 per share) but maintained an Outperform rating on the stock. AuRico shares closed on Friday at $7.12 down $0.34.
Osisko Mining (Stock Profile - TSX:OSK & OTC:OSKFF) reported Q4, 2012 production results and announced 2013 operational guidance. Results were 101,544 ounces at $903 per ounce cash costs which were "in line" with TD Securities analyst Daniel Earle's forecast of 109,000 ounces at $915 per ounce. On the negative side, the company forecasts slightly lower production rates for 2013 with slightly higher production costs. Shares of Osisko Mining lost almost $1.00 this week closing at $6.97.
Sunridge Gold (Stock Profile - TSX-V:SGC & OTC:SGCNF) commenced a drill program at the Kodadu target - part of the company's Asmara gold project in Eritrea. The goal of the program is to identify a resource that could be mined as feed to a central gold plant. Shares of Sunridge Gold traded around the $0.25 mark last week.
Disclosure: at publication date Kirk Exner owns shares of Abzu Gold.