GOLD PRICE NEWS - The gold price stabilized Wednesday morning near $1,160 per ounce after sliding 1.8% yesterday. As stop losses were triggered in the COMEX gold futures pits, the gold price moved lower and broke below support at $1,180 per ounce. The lower gold price led to heavy selling the share prices of gold mining companies, which fell 3.2% as measured by the Philadelphia Gold and Silver Index (XAU). Despite the gold price still clinging to a 6.0% gain in 2010, the XAU moved into negative territory for the year as of yesterday’s close.
The 1.2% drop in the XAU in 2010 continues the trend of the past few years of gold mining producers failing to deliver the leverage to the gold price they have promised. This fact is evident in both the underperformance of the gold stocks versus the gold price, as well as in their earnings figures. Wednesday morning, Newmont Mining (NEM) reported second quarter earnings figures, which missed analyst expectations despite a record high gold price average.
Newmont’s miss was due to both a slow ramp-up at their Australian-based Boddington mine and excessive rain at the company’s Indonesian mining operation. The U.S.-based gold producer earned $0.77 per share - versus estimates ranging from $0.84 to $0.89. Newmont reported 1.3 million ounces of gold production in the quarter and maintained their 2010 guidance of 5.3 to 5.5 million ounces. Despite the earnings’ miss, Chief Executive Officer Richard O’Brien highlighted the increasing confidence in the company’s “ability to fully fund our project pipeline and exploration programs,” which led Newmont’s decision to raise its quarterly dividend by 50% to $0.15 per share.
While Newmont and other large gold producers have struggled to expand profit margins amid a higher gold price, the longer-term macro-economic outlook for the yellow metal continues to look bright. Despite an increasing number of calls for austerity among the leading developed nations, the question remains as to whether the private sector is strong enough to generate growth without public sector support. While the balance sheets of corporations are flush with cash, they are not spending it. Bank of England Governor Mervyn King commented that economic stimulus is still needed and “there is some considerable distance to travel” before monetary policy and interest rates can return to normal. The continuation of loose monetary policies across the globe will likely provide support for the gold price in coming quarters.
CIBC World Markets commented on the recent correction in the gold price, noting “this is a normal pullback in the gold price as a continuation of the long-term rally and we should see support in the $1,100 range before regaining momentum.” The research team went on to comment that “historically, gold corrections has been around 11.4% … we are about 8.3% through that retracement so may still see some weakness; (2) June and July are seasonally weak months for gold prices and gold equities…we should see some rebound in August and then strength in September (2nd best month for gold after November).”
Goldcorp (GG), one of the most widely-held - and profitable - gold miners in the world, reports earnings after the close today while Barrick Gold (ABX), the largest gold producer by both market capitalization and by production, reports tomorrow. Both companies have underperformed the gold price in 2010 as ABX has managed to gain just 1.65% while GG has actually declined 1.3%. Expectations are for strong earnings on the back of record gold prices.
