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Does a Rebound in Gold Prices Change the Outlook for Miners?

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Earlier this month, I noted that gold miners such as Barrick Gold (NYSE: ABX  ) , Goldcorp (NYSE: GG  ) , and Newmont Mining (NYSE: NEM  ) are likely to remain under pressure this year in the wake of declining gold prices. Since then, gold prices have rebounded sharply, with the precious metal jumping to a two-month high in Asian trading on Monday. The key questions are: Will the recovery in gold prices continue? And is it time to change the outlook on miners?

Gold jumps to two-month high
After registering its first drop in 13 years in 2013, the price of gold has recovered somewhat this year. In Asian trading on Monday, the precious metal jumped to a two-month high of $1,278.01 an ounce. The rebound in the price of gold means that gold-mining stocks have risen sharply this year. Year to date, Barrick Gold has gained more than 6%, Goldcorp has gained 9%, and Newmont Mining has increased more than 6%. This even as the S&P 500 index has fallen nearly 5% so far this year.

The recovery in the price of gold is being driven by more safe-haven bets. In the past couple of weeks, investors have been spooked by weak Chinese economic data, currency crises in emerging markets such as Turkey and Argentina, and political turmoil in some other emerging markets. This has boosted gold's safe-haven appeal.

Fed meeting
Gold is likely to continue to benefit as nervous investors pull money out of emerging markets. In addition, there have been reports that India, which is one of the major consumers of physical gold, will review the restrictions it has placed on gold imports by the end of the first quarter. These developments are positive for gold; however, I don't expect the price of gold to post a significant gain.

One of the major drivers of gold's rally in recent years was the Fed's bond-purchasing program. Late last year, the Fed announced that it will start tapering its bond purchases starting in January. The Fed is expected to continue its tapering as planned as the U.S. economy continues to improve. If the Fed continues to trim its bond purchases, gold will struggle to extend its recent gains.

Still bearish on gold miners
I remain bearish on gold miners, as I don't expect a significant rise in the price of gold. The likes of Barrick Gold and Newmont estimated their proven and probable reserves at $1,500 an ounce and $1,400 an ounce, respectively.

Despite the recent rally and the situation in emerging markets, I don't expect gold to reach these levels without the support of the Fed's bond purchases. The Fed will kick off its two-day monetary policy meeting on Tuesday and is likely to cut another $10 billion from its bond purchases.

Given this scenario, gold miners must continue to lower their costs in order to adjust to the new environment. Barrick Gold, Newmont, and Goldcorp currently have all-in sustaining costs at around $1,000 an ounce.

At the current price level, this creates significant margin pressure on gold miners. Miners, though, have been making efforts to lower costs and boost their portfolios. 

Last week, Barrick Gold announced an agreement to divest its interest in the Kanowna Belle and Kundana mine operations in Western Australia. The divestment is part of the company's plan to sell short-life, high-cost, and non-core assets. Goldcorp, earlier this month, announced plans to acquire Osisko Mining as part of its strategy to enhance its portfolio.

While gold miners have been implementing measures to adapt to the new environment, their efforts will have an impact, if any, only in the long term. Therefore, I maintain my bearish outlook on gold miners.

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Varun Chandan

I have a Master in Finance degree from IE Business School in Madrid. I use the top-down approach when it comes to investing. I like to analyze macroeconomic factors and how they impact individual companies.

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