Just when you thought it couldn’t get any worse, it did. Gold investors held on for a long, scary ride in the markets on Thursday as gold broke through $1,300 an ounce and plumbed two-and-a-half-year lows.
The broad sell-off came the day after Ben Bernanke, chairman of the US Federal Reserve, indicated that quantitative easing (QE) is likely to start winding down towards the end of the year.
According to Kitco’s 24-hour gold chart, bullion fell as low as $1,276.80, which is $74.50 below Wednesday’s close, or a 5.5 percent drop. Gold has been falling all week due to investors’ fearful anticipation of what the Fed would say about QE, which has been keeping the fire burning under gold and silver as well as North American stock markets.
It started the week at $1,384 and on Tuesday sank to a four-week low of $1,360. The yellow metal initially ticked up after the Fed announced midday Wednesday that it plans to continue buying US Treasuries and mortgage-backed securities to the tune of $85 billion a month. That changed, however, when Bernanke said in a press conference that QE will likely slow down this year and the end of next year; the metal fell about $17 by the close of the session Wednesday.
At the end of Thursday trading in New York, spot gold was last quoted down $65.50 at $1,286.25, while gold futures for August delivery were down $90, at $1,284 per ounce. Besides QE, other bearish factors behind gold’s meltdown on Thursday include signs of contraction in the Chinese economy, evidenced by a drop in the purchasing managers’ index (PMI), and reports out of India that gold imports will decline by 30 percent. The US dollar was also up sharply following the Fed’s position on QE since an end to the stimulus program would be underpinned by strength in the American economy. Gold and the dollar have an inverse relationship.
The gold price has lost 23 percent of its value so far this year and is officially in a bear market, defined as a 20-percent decline from a high, which in gold’s case was $1,909 reached in August 2011.
Thursday’s carnage in metals was also felt in the stock markets, which saw intense selling pressure. The S&P/TSX Composite Index (TSX:OSPTX) tumbled 300 points, shedding 2.4 percent of its value in the biggest TSX decline since early April, the Toronto Star reported. The TSX Venture crashed below 900 points to 892, a 3.4-percent drop.
“Now that the Fed appears ready to “take the punch bowl away from the party,” many markets are spooked,” observed Kitco’s Jim Wyckoff.
The Star explained the correlation between QE and tanking stock markets as being due to expectations that a rise in interest rates could follow the end of stimulus, thus driving investment dollars out of equities and into income-type investments like bonds.
“We have got away with murder recently with the low interest rates,” said Ron Meisels, president of Phases & Cycles in Montreal.
“People are naive not to think that interest rates are going to eventually have to move up, which means together that bond prices are coming down (and yields going up).”
Unsurprisingly, gold stocks were punished on the double whammy of a gold price drop and broader commodities sell-off. MINING.com reported that top gold producer Barrick (NYSE:ABX,TSX:ABX) free-fell to an astounding 21-year low and noted that Barrick’s market cap of $17.5 billion is now over a third of what it was two years ago, when the company could boast a market value of $54 billion. Other gold majors caught in the crossfire were Goldcorp (NYSE:GG,TSX:G), whose shares lost 8.5 percent, Newmont Mining (NYSE:NEM), down 6.7 percent, and Kinross Gold (NYSE:KGC,TSX:K), whacked 8.3 percent.
Harmony Gold Mining (NYSE:HMY) lost 5.5 percent of its stock value on Tuesday after the South African gold producer said it would write down a portion of the carrying value of its Hidden Valley mine in Papua New Guinea, Reuters reported. Harmony, which mines over 90 percent of its output in South Africa, is looking to diversify into Papua New Guinea, where it also developing its Wafi-Golpu project, a joint venture between subsidiaries of Harmony and Newcrest Mining (ASX:NCM,TSX:NM).
Sibanye Gold (NYSE:SBGL) will find another $31 million in annual costs to pare from its budget, adding to the $39 million the South African miner said it would trim this year, Bloomberg reported. The savings will come from job cuts, reducing overtime and reducing power usage, said Sibanye, a spin off from Gold Fields (NYSE:GFI) that started trading in February.
Newmont’s Conga project in Peru faced more opposition from locals as opponents of the $5-billion mine circled a lake high in the Andes and vowed to stop Newmont from draining it, reported Mining-technology.com. Newmont plans to transfer water from lakes near the mine site to four new reservoirs it would build with Peruvian partner Buenaventura (NYSE:BVN).
Chinese company Shandong Quzing Iron Tower moved closer to acquiring ASX-listed Stonewall Resources (ASX:SWJ) after raising about US$300 million through a private placement, the companies said. Shandong plans to purchase and expand Stonewall’s three properties in South Africa, of which two are producing gold.
Bloomberg reported that Agnico-Eagle Mines (NYSE:AEM,TSX:AEM) is considering, for the first time, entering into joint ventures and buying operating mines. “Agnico may also expand into new countries as it loosens the acquisition criteria it’s stuck to for decades,” CEO Sean Boyd told Bloomberg. “What Boyd won’t change is his vow not to ‘bet the company’ on any single deal.” AEM operates the LaRonde mine in Quebec, the Meadowbank mine in Nunavut, as well as mines in Finland and Mexico.
Junior company news
Junior mining in Quebec got a much-needed shot in the arm on Thursday, when pension fund manager Caisse de dépôt et placement du Québec announced that it has created a $250-million fund aimed at helping capital-starved junior mining companies. The new fund, called Sodémex Développement, will make investments between $5 million and $20 million in development-stage resource companies.
Barkerville Gold Mines (TSXV:BGM) announced a new resource estimate on its Cow Mountain property in British Columbia, Canada. The new estimate shows 17.7 million tonnes of gold ore grading 2 parts per million (2 grams per tonne), or contained gold of 1.04 million ounces in the measured and indicated categories. This time last year, Barkerville unveiled a resource estimate stating that Cow Mountain, part of its Cariboo gold project, contains 10.6 million indicated ounces. However, the BC Securities Commission “identified a number of disclosure and filing issues” with the technical report, prompting the commission to issue a cease trade order pending the release of report that is acceptable to the regulator. That cease trade order remains in effect.
Inca One Resources, (TSXV:IO) a tiny-cap company worth about $4.2 million, said earlier this month that it received approval of its environmental impact statement, allowing future drilling on its Las Huaquillas gold-copper project in Peru. The property has been previously explored by Sulliden Gold, (TSX:SUE) but Inca One says “Only a quarter of the length of the Los Socavones Zone has been drill tested in some detail while the depth remains open.” Intercept highlights included 78 meters of 2.71 grams per tonne gold, and 14 meters of 8.41 g/t.
Securities Disclosure: I, Andrew Topf, own stock in Goldcorp.