Barrick Gold Corporation (USA) (ABX), Goldcorp Inc. (USA) (GG) & Gold: Poor Performance Was Expected

A month ago, in an article published in this blog, I warned about gold being expensive. Despite this, I never thought that the fall would be so violent. I never imagined gold would fall 15% in three sessions to a two-year low of $1,321 in the Asian market on Tuesday. That said, now two questions must be answered:

(1) Why was the fall so sharp? and (2) If you still hold gold in your portfolio through the gold ETF, SPDR Gold Trust (ETF) (NYSEARCA:GLD), what should you do?

According to Goldman Sachs analysts, “The sharp sell-off in gold was triggered by growing fears that the central bank of Cyprus would sell its gold reserves, potentially reflecting a larger monetization of gold reserves across other European central banks.” I believe this theory has some degree of reality but, beyond this short term fact, the truth is that gold was expensive. The world has come back to (slow) growth and gold owes most of its value to its safe-heaven characteristic. Besides, at some point, quantitative easing is going to expire and assets that yield zero cash will not be as valuable as they are now. So I think that Cyprus’ story is a good way to explain the yellow metal’s

There are many ways for you to hold gold in your portfolio. Perhaps the most popular one is being long GLD, but you might be holding gold through producers such as Barrick Gold Corporation (USA) (NYSE:ABX) or Goldcorp Inc. (USA) (NYSE:GG).

If I was still holding GLD I would sell. The reasons can be found in my previous post on the matter. Even if we do have a short term bounce as short positions are closed, I am sure the metal is poised to underperform the S&P 500 going forward. Of course I am not saying that the long term commodities bull story is over. But, first of all, you can have bearish periods within bullish trends and those bearish periods can last months, or even years. Secondly, gold is an odd commodity. As I mentioned before, it owes most of its value to its safe-heaven status. When safe-heavens are no longer required they tend to fall. And they fall even faster when they don’t have maturity dates nor cash yields to offer.

Gold producers are a different story. You should not only take into account the price of the commodity they sell but also their current valuation in a scenario where gold prices might be lower. I mentioned Barrick Gold Corporation (USA) (NYSE:ABX) and Goldcorp Inc. (USA) (NYSE:GG) because they are both good companies representing the commodity but, while one of them is a sell, the other is not.