The price of gold has started off the year on a negative note and has lost nearly 3.9% of its value (year to date). Moreover, gold hasn’t done well in 2012. Is the big gold rally of 2006-2010 over? Is it time to change our way we consider gold as an investment that will sharply appreciate over time? Due to the weakness in the gold market, major gold companies have suffered from it, as it reflected in their financial reports. What’s up ahead for the major bullion companies? Let’s take a closer look at these issues and try and figure what is up ahead for both gold and bullion companies.
Gold is considered a safe haven investment much like U.S long term treasuries. Furthermore, the long term yields and price of gold tend to be correlated. Since the beginning of the year, the 10 year treasuries yield increased by 0.23 percent point. The yield increased despite the FOMC’s program to acquire long term securities at a pace of $45 billion each month. This program may have kept the price of gold and long term treasuries from plummeting. The upcoming publication of the minutes of the FOMC meeting from January could add some insight as to when will the Fed end its current asset purchase program. If the Fed will refer to this issue, it could pull down the price of gold.
Another reason for the decline in demand for safe haven investments is the signs of progress in the U.S economy including the rise in the manufacturing production, and housing. If the U.S economy will continue to rally, this could impede the progress of gold prices.
Despite the point I have made above, the rise in the U.S money base in recent months is most likely due to the QE program implemented by the FOMC. Since the beginning of the year the U.S money base rose by nearly 5%. In comparison, during the same time-frame last year the money base increased by only 3%. As the U.S money base further rises, it could also raise the demand for gold as an investment against a potential devolution of the USD. Moreover, the monthly changes in the price of gold (lagged by two months) and changes in money base have a mid-strong positive correlation of 0.37. Based on this relation, the price of gold, assuming all things equal, will rise in the coming months. This relation, however, should be taken with a grain of salt and it could take time until the rise in the U.S money base will start to affect the price of gold.
If gold prices continue to dwindle, then leading bullion companies, such as Goldcorp Inc. (USA) (NYSE:GG) and Barrick Gold Corporation (USA) (NYSE:ABX), are likely to reflect it as their stocks will decline. Since the beginning of the year, shares of Goldcorp fell by 7.9%; shares of Barrick, by 9.65%. Goldcorp hasn’t performed well in 2012 as the company’s revenues only inched up by 1.4%. Nonetheless, the company’s operating profitability remained high, but also decline last year from 49% in 2011 to 39% in 2012.