Gold Market Free Fall: Time to Jump Ship?
The gradual fall of the gold market intensified this week as investors reacted to signals that the US Federal Reserve would wind down its stimulus bond-buying programs as well as reports that the Cyprus government could sell its gold reserves to fund the country’s debts.
Gold prices tumbled 9%, or $140.40, to $1,361 an ounce on April 15, its biggest one-day decline in more than 30 years. Gold prices made up some of that loss in subsequent days, but are still far from the peak of $1,900, reached in August 2011.
While it’s unclear how long or how far the fall in gold bullion prices will continue, we believe there still are a number of opportunities on the equity side of gold investing.
Since gold equities, including shares of leading gold-mining companies, have lagged behind the performance of physical gold bullion so severely in recent years, they now trade for much less than the value of the companies’ gold reserves.
Therefore, while mining stocks can be more volatile than gold bullion in the short term, given such risks as mine flooding or increased energy costs, we believe they’re attractive over the medium to long term due to their valuations. Even if gold continued to fall, mining stocks would still look relatively attractive. And if gold bullion experienced another bull run, then gold-related equities could be poised to benefit.
We see opportunity in low-cost gold-mining companies that are able to increase production despite commodity prices. We also prefer opportunities in producers who do not hedge their gold exposure, thus enabling them to benefit from a rise in gold bullion prices.
Overall, we caution against overreacting to the recent market news as we believe the risk-reward profile for owning good-quality, low-cost gold equities remains a compelling strategy.
Commodities may subject an investor to greater volatility than traditional securities such as stocks and bonds and can fluctuate significantly based on weather, political, tax, and other regulatory and market developments.
Fluctuations in the price of gold and precious metals may affect the profitability of companies in the gold and precious metals sector. Changes in the political or economic conditions of countries where companies in the gold and precious metals sector are located may have a direct effect on the price of gold and precious metals.