Two years ago, before I became a Fool blogger, I was a blogger for a libertarian movie company called Silver Circle. My job then was to write articles and share stories regarding the Federal Reserve and how it was damaging the dollar. To emphasize these points, I would typically point to the sky-high price of gold and how its strength reflected the growing weakness in the dollar, as well as showing the world why gold is such a great symbol of wealth.
And now, having moved on from that job, I am here to write about the remarkable downturn that gold has taken, and how a charging bull commodity became a big, wooly bear, something that in 2011 appeared almost unthinkable.
In the last year, gold has fallen by 23.2% compared to the dollar, a drop of $370 to $1,227/oz as of June 26, a three-year low. This is largely due to rumors of the US Federal Reserve decreasing its stimulus operations, which in turn would strengthen the US dollar, the base currency that gold trades in, meaning that billions in metal investments have been wiped out. In some cases, hedge funds have even shed gold investment due to the price drop.
Labor unrest in South Africa hurting gold companies
It should therefore come as no surprise that the biggest losers of the past year have been gold mining stocks like Barrick Gold Corporation (USA) (NYSE:ABX) and AngloGold Ashanti Limited (ADR) (NYSE:AU), which run two of South Africa’s biggest gold mines. Barrick’s share price has plunged 47.4% over the past year, with AngloGold Ashanti Limited (ADR) (NYSE:AU) falling 59.4%. This is in relation to the gold output costs being as high as $896/oz. This leaves little room for profitability for either company in South Africa, one of the biggest gold mining regions in the world.
To make matters worse, South African miners’ unions have threatened labor strikes and mine closures unless they get better base pay and improved worker conditions. For these two companies, this is a request too far because under current labor contracts, miners get paid at rates that make it nearly unprofitable already given the low price of gold.
According to some company analysts, gold has to be $1,400/oz on the commodity market for increases in pay to be affordable, the so-called “red line”. With gold nearly $200 below that, it is incredibly difficult, putting mining companies in a bind over taking an indefinite loss of profitability or risking a mine closure.
For AngloGold Ashanti Limited (ADR) (NYSE:AU), which runs the deep Mponeng mine, this would be consequential for world gold markets as well as for the company’s continued business in the country. Barrick Gold Corporation (USA) (NYSE:ABX) would then be poised to reap the benefits as the second-biggest player in the country, despite higher costs. Either way, both companies would have to hope that the labor unrest is controlled, or if gold prices rebound.
Mexican farmers vs. Goldcorp
Meanwhile in Mexico, the biggest gold producer in terms of market value, Goldcorp Inc. (NYSE:GG), has just come out of negotiations with farmers over rented land for the Penasquito mine. The farmers demanded a yearly payment of nearly $3 million/year for the land rather than the previously agreed upon $224,000 lease that Goldcorp signed on to. The farmers’ claim was that the land was being rented for far less than those in neighboring towns were getting, while Goldcorp claimed it was a fair price and was unwilling to up the price.
Like the two companies in South Africa, Goldcorp Inc. (NYSE:GG)’s unwillingness to compromise may have a lot to do with the poor fortunes of this company. Shares for Goldcorp fell 37.5% since this time last year, and unlike South Africa, Penasquito only has about 400,000 ounces of gold down below. That means Goldcorp Inc. (NYSE:GG) has to rely on silver, tin, and copper deposits to boost its Mexican income during this bearish stretch that many in the industry hope is just temporary.