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Goldcorp Inc. (USA) (GG), Barrick Gold Corporation (USA) (ABX): Has Gold Lost Its Mojo?

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Goldcorp 2012 GuidanceGold was one of the top investment choices for the last decade. People who bought gold at the beginning of the decade earned impressive profits. Even though there were downturns in price, most were short term. However, gold has lost its mojo, and is trading almost 20% below its previous high. Gold ETFs, like SPDR Gold Trust (ETF) (NYSEMKT:GLD), have lost about 15% since January.

Reasons behind the recent gold crush

Gold prices dived this year due to many reasons. One is the Cyprus financial crisis: the country may sell its gold reserves. This creates fear for many people, who predict that the price of gold will fall due to increased supply. This unpredictable situation has contributed to decreasing the gold obsession.

Another important reason for the decrease in gold prices is China’s slow economic growth. China has one of the most successful economies of the world, and any change in its economy affects the overall economic condition of the world. The unexpectedly low growth rate of the Chinese economy has made economists uncertain about the future prices of precious commodities.

What about major gold companies?

If gold prices rise, gold companies will enjoy great benefits and vice versa. However, given the recent events, it is very difficult for gold companies to sustain their businesses. Leading gold merchants have faced serious losses during the last few months. Goldcorp Inc. (USA) (NYSE:GG), the largest gold company by market capitalization, has lost 20% this year. Even worse, Barrick Gold Corporation (USA) (NYSE:ABX), the second largest gold company by market capitalization,  has lost 44% since January. Both companies disappointed their shareholders by reporting revenue and profit figures below market estimates.

Both Goldcorp Inc. (USA) (NYSE:GG) and Barrick Gold Corporation (USA) (NYSE:ABX) are trading near book value. Goldcorp Inc. (USA) (NYSE:GG) supports a P/B ratio of 1.06, whereas Barrick Gold Corporation (USA) (NYSE:ABX) has a P/B ratio of 0.93. While Barrick looks relatively cheaper based on the P/B ratio, Goldcorp Inc. (USA) (NYSE:GG) is a safer bet because it has almost zero debt. On the other hand, Barrick Gold Corporation (USA) (NYSE:ABX) has a debt ratio of 0.66. Therefore a fall in gold prices is likely to put Barrick Gold Corporation (USA) (NYSE:ABX) in a worse position than Goldcorp Inc. (USA) (NYSE:GG).

One thing to remember is that gold merchants are not the only ones who are going to suffer from low gold prices. The gold mining companies can face serious threats from decreased gold prices. Market Vectors Gold Miners ETF (NYSEMKT:GDX), which invests in gold mining stocks, has lost more than 40% in the last six months. While the Market Vectors Gold Miners ETF (NYSEMKT:GDX) looks like a relatively more diversified investment, Barrick Gold is the largest component of Market Vectors Gold Miners ETF (NYSEMKT:GDX), followed by Goldcorp Inc. (USA) (NYSE:GG). Therefore, changes in gold prices are likely to have magnified effects on gold miner ETFs, like Vectors Gold Miners.

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