Back to top

Can Gold Stage a Comeback?

Read MoreHide Full Article

The cheer surrounding upbeat U.S. data has had a downward effect for gold. The yellow metal has slumped to a 34-month low of $1,250 an ounce, accompanied by other precious metals.

Marking its largest loss since 1920, gold prices have plunged by 23% this quarter. In fact, gold has lost 26% of its value this year. Precious metals exchange traded funds have lost $60 billion of their value.

Among the prominent ones to suffer are SPDR Gold Shares (GLD - Free Report) , iShares Gold Trust (IAU - Free Report) , ETFS Physical Swiss Gold Shares (SGOL - Free Report) and PowerShares DB Gold (DGL - Free Report) .  This is in sharp contrast to the 12-year long bull run that gold enjoyed, which ended only last year.

Speculation had gradually mounted that the Fed would taper off its bond purchase program which has helped resuscitate the economy. Ultimately, Ben Bernanke’s statement, outlining how the program could be ultimately shut down, proved to be the final straw.

Additionally, gold is primarily held by investors as a hedge against inflation. The lack of rising prices has also acted as a deterrent for prospective gold buyers. Meanwhile, home sales have climbed to a five-year high and consumer confidence has also increased.

So should your portfolio hold any gold? Some market watchers are of the view that the Fed may have to continue with its stimulus package. This is because it will be some time before we have enough evidence to show that the economy can live without the bond-buying program.

Revised GDP numbers released today are a reminder to that effect. GDP increased by only 1.8% in the first quarter, significantly lower than the estimate of 2.4% reported last month. Meanwhile, the People’s Bank of China has stated that it will inject cash into financial institutions requiring such aid when necessary. This is another indication that easy monetary conditions may prevail worldwide, regardless of the implications they have regarding national debt.

There are more fundamental issues which also need to be considered. Though markets continue to trend upward, some measure of volatility remains. Traditional wisdom indicates that portfolios should contain at least 5 to 10% of gold in order to combat any untoward market fluctuations.

The supply-side dynamics present a completely different picture. The state of the mining industry is far from healthy. Weaker gold prices are leading to write-downs and gold companies are focussing on cutting costs and improving efficiency with a vengeance.

Recently, Newmont Mining Corporation (NEM - Free Report) said it would be reducing its workforce by 30% in order to cut costs. One of the major reasons for such a decision is that the cost per mine for gold has increased significantly, keeping pace with rising prices. This was disclosed by Newmont’s CEO Gary Goldberg in a recent interview.

And Barrick Gold Corporation (ABX - Free Report) has also begun streamlining its staff, in a similar development. Earlier this week, the company said it was reducing 100 jobs at its headquarters in Toronto. It has now started to cut back staff in Australia as prices fall further.

Such developments mean that gold supply may ultimately suffer significantly. So, gold may be a risky bet for those wanting to stock up as it plunges to new lows. But over the long run, conventional wisdom might just prevail.

More from Zacks Analyst Blog

You May Like