Wild Gold Price Swings Divorced From Supply / Demand Considerations
On Friday, Apr. 12, gold prices fell more than $80 per ounce to about $1,480. The sell-off, (some called it panicked, some said it was capitulation) means that in technical terms gold has, “broken down.” I am not a big fan of technical analysis. I have no idea where gold is headed next.
Over a longer period, I believe that simple supply / demand fundamentals will set the price of gold. Far less has been written on the fundamentals of gold compared to the technicals. That’s because short-term factors are clearly driving both the gold price and investor sentiment in gold company stocks. However, the underlying fundamentals should give investors some courage to buck the trend of selling and buy select gold companies.
The demand for gold should increase with global population plus growth in urbanization. This might only average 1%-2% per year, but it should be fairly consistent in the long run. Did the global population fail to grow during the 2008-9 Great Financial Crisis? No, it did not. And it’s important to realize that urbanization is occurring not just in Asia, but also in Africa, two regions that account for over half of the 7 billion people on the planet.
Circling back to the title of this article, even flat demand, i.e. zero growth in demand for gold should support the current gold price Why? Because there’s going to be a gold supply crunch before the end of the decade. Taken together, resource nationalism, falling ore grades, fewer discoveries, cost inflation, longer permitting times and delayed / canceled green field projects are making it extremely difficult to bring on meaningful new supply.
That’s a long list of headwinds facing the gold industry. Each is very real and quite daunting. Therefore, gold companies with existing production, or those close to production will become a lot more valuable. Companies with strong balance sheets and low costs will become even more valuable. However, this will not happen overnight.
Majors such as Newmont Mining Corp, (NYSE:NEM) and Barrick Gold Corporation (USA), (NYSE:ABX) have not kept up with the 12 year bull market in gold. Newmont and Barrick failed to deliver shareholder value because they overextended for the sake of growth, at the expense of profitability. Barrick Gold Corporation (USA), (NYSE:ABX) just had its $8 billion Pascua-Lama project in Chile suspended. Barrick has a few billion sunk into the project and may have to walk away.
Newmont Mining Corp, (NYSE:NEM) lost a key gold mining asset in Uzbekistan several years ago. More recently it has faced troubles in Ghana and five protesters were killed at Newmont Mining’s Conga mine in July, 2012. Gold Fields, Goldcorp and Eldorado Gold are three more majors that have suffered in just the past few months.
Allied Nevada Gold Corp. (NYSEMKT:ANV) is a prime example of a very well positioned producer. I chose Allied because its shares have sold off more than any other mid-tier producer. The Company’s stock is down 68% from its 52-week high. That compares to 17% for SPDR Gold Trust (ETF) (NYSEMKT:GLD). Yet, investors need look no further than the Company’s late February corporate presentation to see that Allied has a bright future.