Investors Are Leaving Gold, and Gold Miners Are Cutting Back

Hedge funds and other speculative investors have shifted their investments away from gold to equity markets yielding higher returns. A strengthening U.S economy made the yellow metal less valuable to investors, which prompted significant outflows from gold-backed ETFs. In late June, following news that the Federal Reserve may decide to taper its bond purchasing program, gold prices plunged to $1,180/oz, the lowest point in three years. Canadian gold miners such as Barrick Gold (NYSE: ABX  ) and Goldcorp (NYSE: GG  ) announced large asset writedowns and cost-cutting programs in response to lagging gold prices.

Improving cash flows
In Barrick Gold's second quarter report, the company outlined a plan to reevaluate all its mining assets that produce gold above an all-in sustaining cost (AISC) of $1,000/oz. About 25% of Barrick's mines operate above this level. If an asset runs above $1,000/oz, management said they are prepared to change mine plans and suspend, close or sell the asset to improve cash flows. High-cost mines have prevented the company from generating positive cash flow and profits in the low-priced gold environment. This renewed focus will help the company distance itself from relying on higher gold prices to manage its business.

On August 22, Barrick reached an agreement to sell three of its Yilagarn South assets in Western Australia to industry rival Gold Fields Ltd. for $300 million. The Darlot, Granny Smith, and Lawlers mines produced an aggregated 196,000 ounces of gold at an AISC of $1,145/oz in the first half of 2013. The sale shows Barrick's commitment to remove high-cost mines from its asset portfolio to bolster cash flow and profits. Barrick intends to use the proceeds of the sale for general corporate purposes and debt repayment.

Cost-cutting programs
Goldcorp, Canada's largest gold miner after Barrick Gold, implemented companywide spending reductions to limit its exposure to the current gold environment. Gold miners have become conservative with spending their cash on exploration and expansion projects. Miners cannot afford to take the risk of investing in assets that may not generate sufficient cash flows and profits.

Goldcorp has chosen to defer 2013 and 2014 capital expenditures at its Cerro Negro project in Argentina as well as Éléonore and Cochenour projects in Canada. These measures will reduce 2013 capital expenditures by approximately $200 million to $2.6 billion, according to the company. Goldcorp doesn't expect the delay to affect project schedules or initial gold production. In addition, it lowered exploration spending targets for 2013 to $200 million from $225 million and revised its general and administrative expenses to $164 million from $180 million. 

Barrick joined Goldcorp in aggressive cost reductions to offset the cash flow impact of the declines in metal prices. Barrick's capital and cost reductions totaled $2 billion in the first half of this year. Barrick has cut about $4 billion of previously budgeted capital expenditures over a four-year horizon without dampening gold production projections. Barrick's and Goldcorp's cost-cutting programs will greatly bolster their balance sheets. When gold recovers, they may deploy their preserved cash into new mining and exploration activities to expand growth.

Quantitative easing and SPDR Gold Shares
Fed Chairman Ben Bernanke says the bank expects to trim its $85 billion monthly bond-buying program if the U.S economy shows signs of sustainable growth. Referred to as quantitative easing, the program keeps interest rates low to stimulate U.S economic growth. His statements have rattled gold futures and gold-backed ETFs, which in turn affects gold miners such as Barrick Gold and Goldcorp.

The World Gold Council reported that hedge funds and speculative investors have been exiting their gold-backed ETFs positions, such as SPDR Gold Shares (NYSEMKT: GLD  ) , because of a healing U.S economy. SPDR Gold Shares, the world's largest gold-backed ETF, provides investors access to gold investments without the vagaries of the gold futures market. The ETF has recorded significant outflows, reaching $11.5 billion in the second quarter. 

"The prospect of the U.S government tapering quantitative easing by the end of 2013 had a disproportionate downtrend impact on the gold price as some investors in ETFs saw their key rationale for seeking a safe haven in gold fade," the World Gold Council report said.

During the second quarter, over 400 tonnes of gold flowed out of ETFs because of signs of a strengthening U.S economy and the Fed loosening its monetary policy. Source: World Gold Council

Investors will closely analyze economic data, such as U.S unemployment claims to monitor whether the Fed will ease or tighten its monetary policy. If disappointing economic data surfaces, equity markets fill with uncertainty. Investors could flock to gold futures or gold-backed ETFs as a safe haven to hedge against a weaker U.S economy, shooting precious metal prices higher and causing gold miners to generate higher returns from their lower-cost assets.

On September 17, the Federal Open Market Committee will hold a two-day meeting to discuss economic issues and address their decision on ending the monthly bond-purchasing program by mid-2014.

Bottom line
Investors have pulled away from gold futures and gold-backed ETFs, causing gold prices to plummet. Barrick Gold and Goldcorp are trying to improve their liquidity and capital structure. Gold miners are cost cutting and optimizing their asset portfolios to generate positive cash flow in the future. Gold will become increasingly sensitive to economic data in the coming weeks before the Federal Reserve meeting in mid-September. News on whether or not the Fed will taper quantitative easing could determine if outflows in gold-backed ETFs continue or reverse. 

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Read/Post Comments (9) | Recommend This Article (3)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 27, 2013, at 9:40 PM, onesideoranother wrote:

    I have quite a bit of respect for Motley Fool, but in this case the article is totally off base. Gold in this economic condition should never have gone down in the first place. The money that the Feds are printing, when it hits the market place inflation will be rampant. How will the USA repay the debt that it now owes? No one can answer that because it is impossible to squeeze blood from a turnip. Who cares whether the hedge funds and other people got out of Gold. Do they want to invest in companies stock that is already inflated? Let's invest in a company like Facebook that has a P/E of over 100? At least Gold will have a value. In any other period of time I might agree with the above opinion, but in today's world, Motley Fool is off base.

  • Report this Comment On August 28, 2013, at 1:18 AM, dazle10 wrote:

    Is the writer from the Onion? or maybe Mars! "causing gold prices to plummet" Really, this was written on the 27th of August, prices have been rising for over a month.

    " following news that the Federal Reserve may decide to taper its bond purchasing program, gold prices plunged to $1,180/oz" What news organization does he listen to? Just cause so many writers keep saying that the Fed stopping easing will cause gold to drop doesnt make it so! In fact every time the Fed has commented on stopping Easing gold has risen. Of course Gold will rise because stopping Easing will ultimately be inflationary which will cause gold to skyrocket! It has already started. ETF's have diverged from the real stuff, the phony gold market people are exiting while people are piling into the real stuff. No one wants to be holding paper when inflation skyrockets lest their really holding nothing plus the shorts are unwinding themselves!

  • Report this Comment On August 28, 2013, at 12:05 PM, kingmali wrote:

    Dazle10,

    Gold prices have dropped from Sept. 10 highs to current levels. The article focuses on Q2 performance. Gold performed weak at that time.

    News of Fed tapering did have an impact on gold prices in June. It proved the U.S economy was recovering in Q2, but recent data such as jobless claims and housing sales suggests it not may be the case yet.

    So far in Q3, gold outflows have steadily reversed to inflows, in response to Middle East conflicts and poor U.S economic data in August.

    I agree that tapering raises risk of inflation and higher rates -- two bullish catalysts for gold in the long-term.

    Thank you for reading

  • Report this Comment On August 28, 2013, at 12:06 PM, kingmali wrote:

    Sept. '11 highs***

  • Report this Comment On August 28, 2013, at 12:15 PM, keepitmoist wrote:

    I think the article should say, something like "paper gold losing its shine, but real gold still in demand"

    As you can see ETFs took a hit, but demand for real physical gold increases.

    w/ all the fraud and manipulation in the paper gold and silver etfs, are you guys surprised with what you are seeing?

  • Report this Comment On August 28, 2013, at 8:49 PM, Mikesnumnuts wrote:

    Wish I had bought gold at 1200 cause I'd be up almost 20 percent.

    Anyone think abx.to will correct and drop to around 15 again? That's what I hope but I think it's gonna jump to 30 instead course cause I sold mine

    I think gold will go to 1500 and hangout there awhile

  • Report this Comment On August 28, 2013, at 9:44 PM, kingmali wrote:

    Mike,

    Looking at ABX.TO through technical analysis, the stock has a strong resistance level at around $22.20-22.40. If price breaks that level, we could possibly see Barrick touch the $30 region by year-end. This is my opinion though and I could be wrong. But Barrick is making the right steps to become more profitable in the future, even if gold prices drop.

  • Report this Comment On August 30, 2013, at 10:56 PM, skypilot2005 wrote:

    http://www.marketwatch.com/story/worst-monthly-hit-for-stock...

    Aug. 30, 2013, 4:18 p.m. EDT

    Worst monthly hit for stocks since May 2012

    http://www.sprottgroup.com/thoughts/articles/chart-of-the-we...

    WEDNESDAY, AUGUST 28, 2013

    David Franklin

    Chart of the Week: India gold price at all-time high

    Hmmmm

    Sky

  • Report this Comment On August 30, 2013, at 11:07 PM, skypilot2005 wrote:

    http://wallstcheatsheet.com/stocks/silver-outshines-everythi...

    Wall St. Cheat Sheet » Fox Business »

    Silver Outshines Everything in the Market During August

    By Eric McWhinnie

    August 30, 2013

    “Although gold and silver declined for the third consecutive day, both precious metals posted an impressive month. As the chart shows, silver surged almost 20 percent in August, outperforming everything else in the market. The price of gold jumped 5.7 percent.”

    Wow.

    Sky

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