Gold up, but loses the Midas touch
Local gold stocks surged as much as 9 per cent on Thursday after the Fed stunned investors by holding firm to its huge bond-buying program.
Spot gold surged 4.1 per cent to $US1363.77 an ounce on the news, it's biggest one-day gain since January last year.
Local goldminers road the wave, with Newcrest jumping 7.9 per cent to $12.93 and St Barbara rising 20.2 per cent to 65.5¢. Kingsgate added 16.5 per cent to $1.91 and Silver Lake Resources gained 9.7 per cent to 85¢.
In the short term, gold has won a reprieve, but traders are taking a downbeat view on the long-term outlook.
The question of tapering is not if, but when. Eventually, once the Fed pulls back its bond purchasing, goldminers are likely to come under pressure.
During the Fed's various quantitative easing programs, investors have turned to gold as a haven, but now volatility has return to the precious metal market.
"There's nothing fundamental in gold, you can't really trade gold or gold stocks on fundamentals, gold itself is just store of value," said RBS Morgans senior trader Luke McElwaine. 'The reality is a lot of these producers have very high costs of production. It gets to the point where some of them will struggle to be profitable given a lower than expected gold price."
Spot gold has fallen 18.7 per cent this year, which has been matched by a torrid run for goldminers. In 2013, Newcrest shares have lost 41.7 per cent, St Barbara 70.1 per cent and Kingsgate 56.6 per cent.
"I don't think it reads as a huge positive for the gold price, in the sense that no tapering [by the Fed] doesn't really substantiate a cause for a much higher gold price, unless you have the view that US data continues to soften," said UBS resources analyst Jo Battershill.
Difficulties for goldminers will continue to arise once tapering occurs, as cost pressures increase due to lower margins from gold sales.
"We have a baseline price assumption - $US1200 per ounce - through 2015," said Moody's senior analyst Matthew Moore. "If gold prices drop below our baseline, we expect pressure to increase on [goldminers'] credit profiles."
Frequently Asked Questions about this Article…
The Fed’s decision to hold firm on its large bond‑buying program pushed investors toward safe havens, sending spot gold up 4.1% to US$1,363.77 an ounce. That jump fuelled strong short‑term rallies in local gold stocks as traders reacted to the prospect of continued quantitative easing.
On the day of the Fed announcement Newcrest jumped 7.9% to $12.93, St Barbara rose 20.2% to 65.5¢, Kingsgate added 16.5% to $1.91 and Silver Lake Resources gained 9.7% to 85¢, reflecting a broad short‑term lift across the sector.
According to analysts quoted in the article, the pause offers a short‑term reprieve but not necessarily a sustained long‑term boost. Traders remain downbeat because the question is 'when' not 'if' tapering will occur, and a future pullback in Fed bond purchases could put pressure on gold and mining margins.
Spot gold has fallen 18.7% year‑to‑date, yet it still recorded a large one‑day gain after the Fed announcement. The article highlights a return of volatility to the precious metals market, meaning everyday investors should be prepared for sharp swings in the gold price and related stocks.
RBS Morgans’ senior trader Luke McElwaine noted many producers have very high costs of production. If the gold price is lower than expected, some miners may struggle to be profitable as margins shrink and cost pressures rise.
Moody’s senior analyst Matthew Moore said the firm uses a baseline gold price assumption of US$1,200 per ounce through 2015. If gold prices fall below that baseline, Moody’s expects increased pressure on goldminers’ credit profiles.
No. UBS resources analyst Jo Battershill said the Fed’s decision not to taper doesn’t by itself justify a much higher gold price unless US economic data continues to soften. In other words, the move isn't automatically a large secular positive for gold.
The article notes steep year‑to‑date losses for several miners: Newcrest shares were down 41.7% in 2013, St Barbara down 70.1% and Kingsgate down 56.6%, illustrating the significant downside the sector has already experienced.
Call 1300 880 160
Start a chat
Schedule a call
