Gold up, but losing 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 surprised investors by not beginning to taper its large bond‑buying program, which pushed spot gold up 4.1% to US$1,363.77 an ounce and sent local gold stocks higher (some surged as much as 9%). The decision temporarily boosted demand for gold as a safe haven during ongoing quantitative easing.
According to the article, the rally appears short lived. Traders are downbeat on the long‑term outlook because the Fed will likely taper eventually. UBS analyst Jo Battershill noted that no tapering alone doesn't justify a much higher gold price unless US economic data continues to soften.
On the day of the Fed decision Newcrest rose 7.9% to $12.93, St Barbara climbed 20.2% to 65.5¢, Kingsgate added 16.5% to $1.91 and Silver Lake Resources gained 9.7% to 85¢, reflecting a short‑term surge in local gold stocks.
The article highlights that when the Fed pulls back bond purchases, gold prices could come under pressure. That would tighten margins for producers with high costs, potentially making some miners unprofitable and increasing pressure on their credit profiles, according to analysts quoted.
RBS Morgans senior trader Luke McElwaine said gold itself is primarily a store of value and lacks typical fundamentals, making it hard to trade gold or gold stocks on fundamentals alone. He also warned many producers have very high production costs that affect profitability if gold prices fall.
The article states spot gold had fallen 18.7% year‑to‑date. That decline was mirrored by steep share price drops for miners in 2013: Newcrest down 41.7%, St Barbara down 70.1% and Kingsgate down 56.6%.
Moody's senior analyst Matthew Moore said the baseline assumption is US$1,200 per ounce through 2015. If gold prices drop below that baseline, Moody's expects increased pressure on miners' credit profiles, which matters for investors because weaker credit profiles can raise funding costs and operational risks.
The article notes volatility has returned to the precious metals market after periods of quantitative easing when investors treated gold as a haven. The Fed's actions can trigger sharp short‑term moves, but analysts in the piece warn the longer‑term outlook depends on tapering and broader US economic data.
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