Warren Buffett, the Sage of Omaha, once said: “It’s only when the tide goes out that you learn who’s been swimming naked.” The interesting thing about the markets is that there’s always a “tide” in some market. That’s why it’s crucial to make sure that you’re not “swimming” in that particular market. I believe that the current “tide” we are witnessing is the tide in gold prices. And it’s now officially over. Gold prices have fallen from $1,900 per ounce to less than $1,300. A retreat of over 30% means that the gold market has officially entered a bear market territory. That means all we have to do now is to look for the naked swimmers out there…
The first naked swimmer to admit it
Bloomberg data show about $17 billion in write-downs for gold miners over the past 18 months. That’s how much money gold miners “wrote off” on their balance sheets. In other words, these companies paid way too much for assets, but they’re just now being forced to admit it. The first company to raise the flag was Australia-based Newcrest Mining. The company just announced that it would write down $5.75 billion this month. The company had six producing mines, three of which are not profitable at gold’s current spot price. This month, Newcrest’s shares are down more than 40%.
This write-down is especially noteworthy for two main reasons. First, the sheer size of this write-down is amazing. When a $6.8 billion company like Newcrest is forced to write down $5.75 billion, or 85% of its market cap — it means that something is terribly wrong. Also, this write-down is the biggest one-time charge in the history of the gold mining industry. If Newcrest willingly decided to write-down such a massive sum at one time, I believe the company expects a further decline in gold prices.
Second, Newcrest couldn’t have been alone on its pricey acquisition spree (which resulted in the massive write-down). Gold producers spent $195 billion on acquisitions over the last decade. And some of the world’s biggest gold miners are now in trouble.
Other naked swimmers out there
The acquisition spree in the gold sector has been going on without stop. Only last year, billionaire Carlos Slim and his Minera Frisco bought out a competing Mexican miner for $750 million. Back in 2010, Kinross Gold Corporation (USA) (NYSE:KGC) bid $7.1 billion for the rest of Red Back Mining. Even giant Barrick Gold Corporation (USA) (NYSE:ABX) took part in this party. In 2011, it completed a buyout of its Canadian rival, Equinox Minerals, for $7.3 billion, only to write down $4.2 billion in impairment charges as a result of an ill functioning mine in Zambia.