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July 11, 2013 at 09:43 PM
All that glitters isn’t paying off as it did only a couple of years ago. In April the precious metal entered a bear market, driven by the threat that Cyprus could be forced to sell some of its bullion to cover its bailout and by fears that QE (quantitative easing) in the U.S. might be approaching an end. That was followed at the end of June by its worst quarter ever, when it lost 23% in value, as investors still worried over a possible end to QE. It fell as far as $1,180.71 at the end of June, its lowest level in nearly three years.
While April’s nosedive in price of more than $200 in two days stimulated a buying frenzy that helped bring the price back up—for a while—no such rescue took place in June, even though the price drop was nearly as dramatic: almost $200 over a 10-day span. All over the globe, it seems that many buyers are waiting—maybe for better prices, maybe out of fear that if they buy now they’ll see the bottom drop even lower.
It doesn’t help that in India, new import restrictions have slowed the country’s normally heavy consumption of physical gold and in China, buyers are more or less sitting out the market. ETFs haven’t done well, either, with the price drop sending outflows soaring. That’s probably not surprising, considering the drop not just in the price of gold in but mining stocks as well, which have lost even more than gold.
Many mining companies are trading at junk levels despite having actual ratings higher than junk; Toronto-based Barrick, for instance, which is the world’s largest gold mining company, holds an investment grade of Baa2 but its implied bond rating, according to Moody’s, has deteriorated to Ba1. With gold futures trading at the end of June in the neighborhood of $1220 an ounce, down 36% below the record they set in September of 2011 of $1,923.70, it’s not an encouraging atmosphere.
But getting back to ETFs: If they’ve invested in gold, they’re not happy. The SPDR Gold Trust, which at one point was actually the world’s largest ETF, has lost half its value, falling from $76 billion down to $38 billion as of the beginning of July. It is now only the fifth largest ETF, thanks to the fall in gold prices and to the actions of worried investors, who have withdrawn some $18.1 billion.
According to Morningstar analyst Janet Yang, the rout in gold prices is hardly unexpected. The equity team has been expecting gold to be around $1,200 an ounce, even when it was $1,900, she said. “This is a story that’s been going on for the past two or three years,” she said. “In 2011, gold was still going up, but gold mining companies had been going down and a lot of people thought there was a lot of value there—almost an arbitrage opportunity between buying gold and buying mining companies. The discrepancy stayed, and as gold goes down, it can get even more dire [for mining companies].”
