Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
By John Whitefoot for Daily Gains Letter
After 12 years, gold bullion’s glorious bull run ended with a thud in 2013, retracing 30% and locking in the biggest annual decline since 1981. Many speculate that gold bullion prices melted in 2013 as investors tried to figure out when the Federal Reserve was going to be cutting its generous $85.0-billion monthly bond purchases.
Investors lean toward gold bullion and other precious metals as a hedge against both a weak U.S. dollar and inflation. A tapering of the Federal Reserve’s monetary policy suggests that the U.S. economy is getting stronger. While there was no real sign of sustained economic strength in 2013, just the idea that the Federal Reserve would have to start tapering at some point was enough to send gold bullion prices lower.
That coupled with a strong—but misguided—run on the S&P 500 also helped push gold bullion prices lower. I say “misguided” because quarter after quarter, more and more companies on the S&P 500 revised their earnings guidance lower. At the same time, companies masked their weak earnings and revenues with cost-cutting measures and near-record-high share repurchase programs.
That came to a crushing halt at the beginning of 2014, when the Bureau of Labor Statistics reported abysmal January payroll figures. Instead of adding the forecasted 196,000 jobs—the U.S. economy added just 74,000.
Weak January payroll data coupled with political tension in Ukraine helped send gold bullion prices higher. Between the beginning of January and the middle of March, gold bullion prices rebounded, climbing 15% year-to-date to around $1,390 per ounce.
The bullish run in gold bullion didn’t stop the bears from warning investors to avoid the precious metal at any cost. On March 20, The Goldman Sachs Group, Inc. predicted that bullish influences, including Ukraine and the weather, were fleeting and the U.S. economy would rebound. As a result, the company predicted gold bullion prices would fall to around $1,050 per ounce by the end of the year, roughly 20% below today’s valuation. (Source: Russolillo, S., “Goldman Sachs: Gold’s Rally Won’t Last,” The Wall Street Journal, March 21, 2014.)
Gold bullion bears were rewarded again last week, when newly crowned Federal Reserve Chair Janet Yellen said that the economy was doing better and the Fed’s economic stimulus could end this year, with interest rates rising in early 2015. It’s music to the ears of gold bullion bears—a strong economy and rising interest rates with a manageable inflation rate of two percent.
But not so fast. For technical analysts, gold is entering a potentially bullish phase. The 50-day moving average for gold bullion prices recently climbed above the 200-day moving average—a bullish indicator.
Chart courtesy of www.StockCharts.com
Over the last 14 years, gold prices have flashed seven golden crossovers (each marked by a green circle in the above stock chart). The golden crossovers in 2001, 2004, 2005, 2006, and 2009 all rewarded gold bullion bulls. The golden crossover in 2012 failed to really materialize.
So what about this time? Demand continues to be high, with China recently surpassing India as the world’s largest buyer of gold bullion. Geopolitical tensions in Russia and Ukraine are ongoing, and with sanctions being imposed on Russia by the U.S. and other members of the G8, things could escalate. Even though the U.S. economy shows signs of life, it is still fraught with a number of weak underlying economic indicators.
While the current golden crossover might not forecast an immediate run on gold prices, there are certainly a lot of factors favoring a run on gold bullion. Investors interested in gold might want to consider looking into a gold exchange-traded fund (ETF), like iShares Gold Trust (NYSEArca/IAU) or Market Vectors Gold Miners ETF (NYSEArca/GDX).
