To say 2013 was a bad year for gold would be an understatement. Assuming no significant changes unfurl over the course of the last three weeks of the year — and it doesn’t like any such changes are in the cards — the SPDR Gold Shares (GLD) exchange-traded fund is going to end the year with a loss of right around 26%.
It’s an even worse showing for gold mining stocks. Barrick Gold (ABX) is in the hole by 53%. Newmont Mining (NEM) shares are down 49% year-to-date. The Market Vectors Gold Miners ETF (GDX) has lost 54% of its value year-to-date.
What gives? And more than that, what does the future hold for gold and gold miners after a miserable 2013?
2013: An Ugly Year For Gold
You have to give credit where it’s due … gold had a pretty good run, keeping investors on the hook long enough to drive the commodity up 133% between late 2008 and late 2012. The Fed was stimulating like crazy during that time, flooding the economy with cheap dollars throughout that span, which inevitably was supposed to lead to rampant inflation.
After four years, though, it became clear the inflation explosion just wasn’t going to happen. All it took for already-frustrated gold bugs to completely reverse course was April’s whisper of a slowdown in China followed by the mere mention of the word “taper” in May, and that was it — gold hasn’t been the same since.
Of course, it’s not as if a lack of inflation is the only reason the commodity finally hit a wall this year. Interest rates — the 10-Year Treasury yield, for example — are on the rise in more than a superficial way. And although the U.S. dollar seems to have slowed downs its gain (a rising greenback pushes the price of gold lower), it’s not like the sawbuck is falling back into a funk now.
Interest rates and currency-exchange rates are relatively arbitrary, though. The real proof of the pudding is in what traders do with their money. So, what are gold’s usual buyers and sellers doing with their investment dollars?
That’s where things get really ugly for gold.
While the fourth quarter’s supply/demand trends aren’t in yet, demand for gold — the amount of money being used to actually purchase the stuff — has been deteriorating … fast. The World Gold Council reports that last quarter, the world only bought (net) 868 tonnes of gold, down from the 915 tonnes purchased in the second quarter, and well below gold’s peak consumption (of 1,223.5 tonnes) in the Q3 2011.
In fact, gold purchases have fallen in six of the past eight quarters, and last quarter’s demand was the weakest it has been since the third quarter of 2009 — before gold fever spun out of control.
As for where demand is drying up, the answer is (almost) all the way across the board. Technology companies continue to use right around 100 tonnes of gold per quarter, but mutual funds and ETFs like the GLD have been net sellers all year long.
Even the world’s central banks, who had been hoarding gold as a way to defend against currency volatility, are cutting back on their purchases.
Gold Outlook for 2014
It’s undoubtedly a minority opinion, but the coming year doesn’t appear as if it’s going to restore gold’s heroic uptrend between 2008 and 2011. The consumption trend is decidedly negative, and with the economy looking a little stronger every week, the Fed’s tapering in the cards sooner than later. Once that spigot of cheap and easy dollars is turned upward, what little inflationary pressures we’ve seen thus far will dry up too.
Moreover, as the economy continues to gain steam, abnormally low interest rates are apt to at least drift higher to levels more commensurate with a tepid (though not red-hot) economic growth.
Since gold is largely sought to hedge against inflation, against currency volatility and against a weak dollar, it all begs one key question: Why own gold now, when none of those three problems are on the table?
Good answers are few and far between.
Gold prices could — and likely will — continue to slip, perhaps all the way down to the $1,050 area. That level was a key ceiling in 2009, but could have become a floor in the meantime. The equivalent line in the sand for GLD stock is the $100 mark. Yes, any floor is a good thing for current shareholders, but it still leaves from for a 20% dip before gold’s risk and reward find equilibrium.
It’s apt to be even worse for the miners like Newmont Mining or Barrick Gold, who have watched gold prices tumble to levels lower than what these companies must spend to dig it up in the first place.
ABX spends about $919 per ounce to mine gold, which still is less than gold’s current price of $1,263 per ounce. However, its mining costs continue to rise while prices continue to fall. A little downside in gold prices means a big hit on Barrick Gold’s margins.
Meanwhile, NEM faces an “all in cost” of between $1,100 and $1,200 per ounce. Translation: It wouldn’t take much lower prices for Newmont to lose money just by continuing to operate.
The all-in costs for Newmont Mining and Barrick Gold are fairly typical for all major miners too, so don’t assume the Market Vectors Gold Miners ETF will abate any of this risk.
While gold will most definitely have a few solid bullish thrusts in 2014, the proverbial jig is up — gold neither works, nor is needed, as a hedge. As more and more investors come to terms with this unexpected reality, the commodity will face an increasingly tougher environment.
While we saw glimmers of this new mind-set in 2013, this reality should start to become prevalent in 2014.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.