Storm Clouds Gather on the Horizon for Gold and Gold Miners

Don’t expect any bounce in the gold price in coming months. There are signs that the yellow metal will fall further, making gold miners such as IAMGOLD Corp. (TSX:IMG)(NYSE:IAG), Goldcorp Inc. (TSX:G)(NYSE:GG), and Barrick Gold Corp. (TSX:ABX)(NYSE:ABX) unattractive investments.

| More on:
The Motley Fool

Predicting the outlook for gold has become something akin to gazing into a crystal ball. There is growing uncertainty over what the future holds for the lustrous yellow metal.

One thing that is becoming increasingly clear is that as with other commodities, low gold prices are here to stay. This makes investing in gold and gold miners unattractive investments.

 Now what?

Gold, like other commodities, is a hard asset that is tangible in nature. What sets it apart from them is that it behaves very differently because it possesses many of the characteristics of a monetary asset.

It is here that the confusion starts for investors, analysts, and economists alike.

You see, unlike other commodities, gold has little to no utility. This means that in contrast to silver, copper, zinc, or nickel, it has few productive uses, making it difficult to determine its fundamental value.

The majority of gold is used in the manufacture of jewellery or is directed to the investment market and central banks where it is a store of value and hedge against risk.

It is this distinct lack of utility that makes gold a particularly volatile asset. Data shows that it has been among the worst-performing assets over the last 40 years.

There are signs that this can only continue.

The Fed’s rate hike in early December 2015 has increased the opportunity cost of holding zero-yield assets such as gold. This has triggered an outflow of capital to those investments that offer higher yields when interest rate rise.

Then you have to consider the growing strength of the U.S. dollar.

When the U.S. dollar rises the value of gold, just like other commodities, falls. With an increasingly robust U.S. economy, the dollar can only appreciate further in value, applying even more pressure to the price of gold.

As a result, gold could fall below US$1,000 an ounce in the coming months, which, for many gold miners, is below or close to their cost of production. This means many higher-cost producers such as IAMGOLD Corp. (TSX:IMG)(NYSE:IAG), which has all-in sustaining costs in excess of US$1,000 per ounce, will become unprofitable.

It will also force many gold miners to revise their gold reserves, their core asset, downwards. Gold reserves are calculated using a market price that determines whether or not they are economical to mine, and US$1,000 per ounce means that many reserves are uneconomical.

You can see this occurring with industry heavy weight Goldcorp Inc. (TSX:G)(NYSE:GG). It last calculated its reserves using US$1,300 per ounce, so a reduction to US$1,000 per ounce will force it to revise its reserves downwards and take a series of write downs on its mining assets. This will ultimately force its share price lower as its assets fall in value.

The rate hike will also impact miners such as Barrick Gold Corp. (TSX:ABX)(NYSE:ABX) that have highly levered balance sheets because the cost of servicing that debt has increased. Barrick, despite aggressively reducing its debt load through asset sales, still has over US$11 billion in debt, which cost it almost US$600 million to service for the first nine months of 2015.

 So what?

The outlook for gold and gold miners remains significantly pessimistic at this time, and I expect it to remain so for at least the first half of 2016. This makes gold and gold mining stocks rather unappealing investments, which are likely to head lower as gold continues on its downward trajectory.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned.

More on Metals and Mining Stocks

A worker wears a hard hat outside a mining operation.
Metals and Mining Stocks

Cameco Stock Is Approaching its 52-Week High: Time to Invest?

Cameco (TSX:CCO) stock is nearing 52-week highs once more after falling from September last year, but should you wait for…

Read more »

Diggers and trucks in a coal mine
Metals and Mining Stocks

Teck Stock: A Value Stock Worth Owning

Teck stock may be up this year, but it's still worth your attention if you're looking for a long-term value…

Read more »

Gold king in chess game face with the another silver team on black background (Concept for company strategy, business victory or decision)
Stocks for Beginners

Barrick Gold Stock Gained 15% in January—Is It a Buy Today?

Gold has gained 15% since October while Barrick Gold stock has gained nearly 30%.

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Metals and Mining Stocks

Lithium Americas Stock Just Jumped 10% in a Single Day: Is it a Buy Now?

LAC stock has already jumped by 35% in 2023 so far. But is it worth buying now? Let’s find out.

Read more »

tsx today
Metals and Mining Stocks

TSX Today: Why Canadian Stocks Could Rally on Wednesday, February 8

Continued recovery in commodity prices could lift the main TSX index at the open today.

Read more »

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Tuesday, February 7

An overnight recovery in oil prices could help TSX energy stocks open slightly higher today.

Read more »

Nickel ore is mined from the ground.
Metals and Mining Stocks

This Little-Known Materials Company Has Quietly Gained 20% in Just 1 Month

This materials stock has seen revenue explode in the last year alone, causing shares to climb higher and higher. And…

Read more »

A lake in the shape of a solar, wind and energy storage system in the middle of a lush forest as a metaphor for the concept of clean and organic renewable energy.
Metals and Mining Stocks

Is Now the Right Time to Buy Battery Stocks?

The electric vehicle boom is slowing due to supply chain issues. As these issues unfold, is now the time to…

Read more »