The outlook for gold had been bearish at the beginning of this year after the precious metal fell nearly 30% in 2013. The bearish outlook did not come as a surprise given that the Federal Reserve's bond purchase program, one of the key drivers of gold prices in recent years, was in the process of being wound down. However, the price of gold performed rather well in the first two months of this year, helped by geopolitical tensions in Ukraine.
The outlook also improved amid expectations for strong physical demand from Asia. But the price of gold has come under significant pressure, dropping to a 16-week low on May 29 before making a slight recovery. So has the outlook for gold once again turned bearish, or do the fundamentals remain strong?
Gold's sharp losses
Gold's price fell sharply in the week ending May 30 as an improving U.S. economic outlook boosted the U.S. dollar. Gold also slipped as investors cut safe-haven bets despite the ongoing geopolitical crisis in Ukraine. On Thursday, May 29, the price of gold fell to a 16-week low of $1,251.10 an ounce. It recovered in Friday's trading session but was still hovering at around $1,256 an ounce. That is well off the highs gold hit earlier in the year.
The sharp losses for the week mean that gold is headed for its second monthly drop in three months. The outlook for gold at the beginning of the year was bearish, but that changed in the first two months of this year as prices recovered. With the drop, has the outlook once again turned bearish?
Fundamentals remain intact
The drop in gold's price came shortly after the World Gold Council in a recent report emphasized encouraging trends for gold demand. The report highlights the fact that the gold market will be driven by physical demand going forward.
Last year, when the price of gold fell sharply, the precious metal found support at around $1,200 an ounce, helped by strong physical demand from China. The price of gold is currently still well above that level. While so far physical demand in Asia has been subdued despite the drop in price, it is likely that a further drop in the price will boost demand in the region.
Physical demand could also get a boost from India, which until 2012 was the biggest consumer of gold. India was overtaken by China as the world's biggest consumer of gold last year. This was largely due to the fact that demand in India was negatively affected by measures introduced by the Indian government to curb gold imports and lower the country's current account deficit.
However, there was a change in the Indian government two weeks ago following an election, and the new government is expected to lift most of the restrictions on gold imports. In fact, gold premiums in India have dropped sharply in anticipation that the new government will ease import restrictions. According to Reuters, premiums halved to $30-$40 an ounce over the global benchmark from $80-$90 last week.
Meanwhile, the Indian central bank also lifted some restrictions on gold imports earlier this month. All these developments mean that physical demand in India could pick up, which augurs well for gold prices.
Good opportunity to buy gold miners
The price of gold will continue to find support at around $1,200 an ounce. Given this scenario, gold mining stocks look attractive, especially as miners focus on cost-cutting measures.
In the first quarter, Goldcorp saw its all-in sustaining costs drop to $840 an ounce and expects them to be between $950 and $1,000 an ounce. Barrick Gold also expects all-in sustaining costs of between $920 and $980 an ounce this year.
If the cost targets are achieved and prices remain above $1,200 an ounce, miners are likely to have positive cash flows. Despite the pullback in gold's price this week, I think the outlook for the gold market and miners will continue to improve. The pullback in gold mining stocks this week should be seen as a good buying opportunity.
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