Gold In The New Year: A Mini Comeback After Market Bottoms?

 @natrudy
on January 14 2014 10:13 AM
  • Gold bars Austria 2013
    Gold bars Reuters
  • Gold Bars Zurich April 2013
    Gold bars in the vault of the branch office of precious-metal trader Degussa in Zurich. Reuters
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The world’s most-watched precious metal has made a modest comeback in early 2014, weeks after it suffered its worst price decline in 32 years last year.

Major hedge funds including the $3 billion Passport Capital and the $1 billion Vermillion Asset Management LLC, owned by the Carlyle Group LP (NASDAQ:CG), plan to bet on gold in coming weeks, the Wall Street Journal reported on Tuesday.

Gold rebounded to $1,252 per ounce at Tuesday’s open on the New York Comex exchange, following weeks where it hovered near the $1,200 mark, or precariously close to $1,180 per ounce, 2013’s yearly trading low.  

That’s a rebound of 4 percent so far this year, relative to lackluster stock market gains. The Dow Jones Industrial Average has fallen by 1.92 percent so far, while the Nasdaq index and the S&P 500 are down by about 1.5 percent each, after an exceptionally strong year for equity markets in 2013. Gold investors view a shift of about $50 per ounce, up or down, as a significant price shift.

Major gold producer Goldcorp Inc. (TSE:G), among the world’s top ten gold producers by tonnage, also plans a $2.4 billion bid for smaller Canadian rival Osisko Mining Corp. (TSE:OSK), in a sign that gold miners may be taking advantage of depressed enthusiasm for gold and gold mining shares, to secure cheaper deals. Similar moves have been made in the silver sector, with attractive low valuations for deals, a silver mining executive told International Business Times last year.

Much gold buying in the new year could be due to investors rebalancing their exposure to two major commodity indices, however. The Dow Jones UBS Commodity Index and the S&P GSCI both require specific gold allocations, so the metal’s gold’s price plunge means investors must buy more gold to shore up percentage totals for portfolios.

In a Dec. 4 report, CPM Group actually highlighted gold mining stocks as a potential comeback story for late 2014, in an unorthodox investment pitch. Gold mining stocks have fared badly in 2013, as gold miners suspended projects amid lower gold prices and high production costs.

Gold mining stocks are at their lowest prices since the worst of the last gold bear market, from 1997 to 2002, wrote CPM Group analysts. Sharply falling production costs in mid-to-late 2013, spurred by investor disenchantment and gold’s own price decline, have tightened up finances at these lumbering giants, long known for letting costs spiral out of control.

“There is some rejuvenation of interest in mining equities beginning to emerge. CPM Group … expects equity investors to return to the mining share market slowly but steadily. Such a revival may be anemic for a few more quarters, but by the final quarter of 2014 it may be more clearly in place,” according to the report on precious metals.

“Gold equities would be expected to turn higher before the price of gold,” the report said.

Not all analysts are bullish, though, and much skepticism persists about gold’s prospects throughout 2014. Gold is often viewed as a bet against the economy and on higher inflation, so a bright economic future for the U.S., as depicted in much recent economic data, augurs badly for gold. Investors and money managers, too, pulled back $38.8 billion from gold funds in 2013, the most since 2000, Bloomberg reported.

“We see more significant downside building throughout the year in gold,” due to rising interest rates, Goldman Sachs Group analysts said in a Jan. 12 commodities note. They foresee gold prices ending 2014 at $1,050 per ounce, below 2013 lows.

Disappointing jobs numbers from last Friday, where employers added far fewer jobs than anticipated, could spur gold up to $1,300 per ounce. But gold isn’t likely to stay there long, as investors could use a rally to sell the metal for a quick profit. Many analysts see sustained levels far above $1,300 per ounce as unlikely in the short term.

“Gold’s response highlights a market that has been burned, quite badly; and investors are operating with the mindset of once bitten, twice shy,” UBS AG analysts said in a note on Monday. “Gold bulls are in a lonely place -- after a disastrous 2013, few investors are willing to trust gold at this stage.”

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