Volatile Gold Prices Hit Mining Stocks But Relief In Sight

Gold miners including Barrick Gold Corporation (NYSE:ABX), Freeport McMoran Copper (NYSE:FCX) and Newmont Mining (NYSE:NEM), all are seeing their stock prices hovering at this year’s lows as gold prices have taken a hit amidst euro zone concerns lingering over global markets.

Below we take a look at recent developments, which could impact the gold prices and thus value of aforementioned companies.

Gold Acting as a Risky Asset…

Not too long ago, the global economic worries forced investors to look for alternatives to the capital market. Precious metals often serve as substitutes in weak economic situations and witnessed huge inflows thanks to economic instability. Gold, popularly know as risk haven, has rallied substantially in the past few years, with the price per ounce of gold trebling from just about $600 in 2007 to more than $1,900 in 2011. ^[1]

But of-late, it seems gold has shrugged off risk haven status and is acting more like a risky asset. Concerns are again mounting about the euro zone’s future after recent elections in debt stricken Greece where no party has a clear mandate. Many are speculating even if they are successful to form coalition government, it will accept the bailout package agreed earlier. This is leading to strengthening in another risk haven asset the U.S. dollar. This could be one of the reasons for heavy sell-off in gold.  Another probable explanation for this slump could be nervous institutional investors unwinding their position in yellow metal to book profit or to offset their losses in equity market.

See our complete analysis for  Barrick Gold | Freeport | Newmont

… But Intact Demand Should Lend Support

We believe any further correction in gold will invoke the fear of regret amongst many, who missed the ride last time. Also, with the Federal Reserve’s intention to keep interest at near-zero levels and a possibility of further quantitative easing, we foresee gold prices to bouncing back and continue their run-up going forward.

Further, one of the world’s largest consumer India has also agreed to lift recent import taxes imposed on the precious metal. This should also douse demand concerns if any. ^[2] China is also catching up with India in gold consumption, which should lend support to the gold prices in near term.

Rising Costs Remain a Concern

However, one should closely keep a watch on alarming rise in mining costs. Rising energy prices and some other input costs are largely to blame. Moreover, due to the increase in gold prices, many mines have increased production, often moving into lower grade sections. It is costlier to extract any mineral or metal from the lower grade of ore.

Overall, we believe that despite near term concerns about gold, it will very likely recover in light of a dwindling confidence about the economic growth. We are bullish on these miners’ prospects and believe that the our price estimates for them are justified.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Gold Price, goldprice.org, May 15 2012 [↩]
2. India Removes Excise Tax on Gold Jewelry, The Wall Street Journal, May 7 2012 [↩]