It hasn’t been a great year for gold, and investors and miners alike are still trying to recuperate from the declines. If you had your hand in the gold market, you may be feeling it too.
Gold declined quite a bit this past year, which is something people don’t like to see – especially with an economy that is all over the place. Gold has always been the safe zone. It’s where investors turn when they don’t feel confident enough to put their money into other investments.
The good news is there has been some relief the past week. Gold has started to rise again. You probably already know this, and perhaps it’s given you some hope for a comeback for the safe haven. Mining stocks have certainly seen an uptick. But before you start falling in love with it again, do your research.
Gold prices may be rising, and mining stocks along with them, but it’s unclear how long the mines will see profits. Many of them, such as Canada’s Goldcorp Inc. (NYSE: GG), have seen a recent increase in profits but only after a huge fall in third-quarter profits.
Due to the decline, they have cut back on production. The fall in gold prices prevented these companies from starting and finishing large projects in developing markets, which will hurt for a long time.
Goldcorp, for example, suspended exploration and delayed other development activities in Argentina. It doesn’t believe it will be able to pick up again until well into 2014. The capital cost was estimated to be as much as $1.8 billion. With the increases in gold production costs, this is significantly higher than what it was a year ago – $1.35 billion more.
Goldcorp isn’t the only gold miner scaling back. Companies in West Africa are still feeling the pressure too, and many have had to suspend new projects. As companies mine lower ore grades, mining costs have increased, something West Africa can’t afford – even with a recent price increase.
In fact, AngloGold Ashanti (NYSE: AU), the largest gold producer in Africa, said it would stop excavation at Yatela Mine in Mali.
A number of others will have to stop development as well. Endeavour Mining (TSX: EDV), a major gold producer, is also planning to cut back production.
As of today, gold continued to tick up with a 0.3 percent rise to $1,355.51 an ounce. But just two weeks ago, gold hit a three month low. So how will this affect your decisions to invest in gold and gold mining?
U.S. Economy Influence on Gold
The more the U.S. Federal Reserve fuels the economy with quantitative easing, the more support gold will have as the dollar is weakened.
But if the Federal Reserve starts tapering in 2014, gold prices will dip as they did on speculation of tapering. Investors may start buying gold to save their portfolios from a declining economy – which is what is expected when the free money gets taken away bit by bit – but as the dollar rises, gold will most likely move opposite.
For now, the Federal Reserve isn’t likely to touch QE. Unemployment is still at a high rate, and as long as that stays up, the Fed will continue to foster economic growth and job creation with money. For that reason, gold will continue to rise and fall with the tides of the economy.
Gold miners will continue to deal with the volatility of the gold market as their mining costs rise, but increases in the price of gold can help them recover some of the losses they saw this year. The best they can hope for is a spike in gold demand that outweighs production, which would cause mining costs to drop.
But that big of a spike is unlikely for now. Your best bet may be to hang on to gold while still keeping an eye on the mining stocks. They’re too volatile at the moment, but if gold rises enough, they will be able to recover some of these losses.
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Other Investments to Consider
The Fed is holding on to stimulus a bit longer. You don’t have to worry too much about it tapering, particularly as the economy recovers from the shutdown. This will push gold up a bit more through the end of the year.
But there are other investments that favor low interest rates and a devalued dollar as well. For example, the housing market is still moving upward. Home sales are expected to rise because of the low interest rates and easy borrowing banks are offering now. Buying and selling real estate is hot, and this will continue well into 2014.
Foreign currencies are also heading up right now. The more the Fed prints money, the more the dollar will decrease in value, which means other currencies will be a good investment. Do your research and start considering it – but be careful. When the Fed starts to see the economy looking up, these currencies will plunge again as they did simply on speculation of tapering.
And keep an eye on the gold miners. Poor economic reports will continue to push gold upward, and this could provide support for some of the beaten down miners.
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