Bad news, folks. I went and opened my big mouth. Back in mid-April, I reported that spot gold was doing something we hadn't seen in five years. Following a multiyear decline between 2011 and 2015, and some wild vacillations in recent years, gold hadn't closed below $1,300 per ounce (at the time) for a period of 105 calendar days -- its longest such streak since 2013. A month after noting this, physical gold broke below $1,300 an ounce. And it hasn't stopped there.
Late last week, physical gold and silver were smelted by investors, with a stronger dollar, rising 10-year Treasury yield, and suddenly strengthening U.S. economy, pummeling precious metals. Silver shed close to 4% of its value on Friday, with gold dipping by $23 per ounce to $1,279, according to Kitco. The move lower in the precious yellow metal places it at a five-month low.
All that glitters isn't gold of late -- but it can be once again
For investors who own physical metals, or who have stock in gold miners -- I fall into the latter camp -- a declining spot price is never ideal. However, it's certainly not the end of the world, either. There are four reasons, in particular, I believe it would be a bad move to worry about the recent decline in spot-gold prices.
1. There are always push-pull catalysts
To begin with, investors should understand that there are always going to be positive and negative catalysts for the gold market.
In recent days, a strengthening U.S. dollar and rising Treasury yields have chased investors away from the yellow metal. But at the same time, the Federal Reserve also increased its inflation forecast in the U.S., which, although it's a bit of a knee-jerk indicator, tends to be a positive for gold. Even with rising interest rates, and therefore yields on interest bearing assets, I don't believe there's enough incentive as of yet to get investors to abandon gold in favor of bonds or CDs.
2. The supply-and-demand outlook isn't all that worrisome
Another reason to not overreact is gold's supply-and-demand outlook. On one hand, the World Gold Council's first-quarter demand trends report does show that supply (1,063.5 tons) outpaced demand (973.5 tons). This represented the weakest first quarter in terms of gold demand in 10 years. Generally speaking, the rules of economics suggest that in cases where supply outpaces demand, the price of a good should fall.
However, parsing out the specifics of this demand, the World Gold Council notes that most of this Q1 decline stems from weakness in investment demand for gold bars. Demand from the jewelry industry, technology sector, central banks, and exchange-traded funds remains steady or strong. Though investment demand can fluctuate, these industrial uses for gold, along with global central banks' desire to own gold, should leave investors feeling better about gold's supply-and-demand outlook.
3. AISC has improved dramatically for miners in recent years
When looking specifically at gold stocks, investors can take solace in the multiple avenues they've used over the last three to five years to dramatically cut costs. In many instances, gold stocks have reduced their capital expenditures, and therefore exploration budgets, improved recovery efficiency within existing mines, paid down or eliminated debt by jettisoning non-core asset or by using positive operating cash flow, and have focused on only their highest ore-grade assets. The result is that most gold stocks could be profitable even if spot gold prices were significantly lower.
As an example, Barrick Gold's (NYSE:GOLD) first-quarter operating results show the company sticking by its all-in sustaining costs (AISC) forecast -- essentially, a measure of all of the costs it takes to keep the existing mines operational -- of $765 an ounce to $815 an ounce. At the midpoint, that's still nearly $490 an ounce lower than where gold is currently trading.
Not to mention, Barrick Gold has significantly reined in capital expenditures and reduced its debt in recent years. Total attributable capex in 2018 is about $1.5 billion at the midpoint, or more than $1.1 billion lower than what the company expected to spend in 2012. Further, Barrick Gold reduced its total debt from $13.1 billion at the end of 2014 to just $6.4 billion as of the end of 2017. Of its remaining debt, more than three-quarters doesn't mature until after 2032. Barrick Gold, along with many of its peers, are set up to deal with declines in gold prices.
4. Gold stock valuations remain attractive
Finally, investors should be excited about the existing valuations among gold stocks.
As I've touched on previously, most gold stocks tend to be fairly valued around 10 times their annual cash flow per share (CFPS). I prefer CFPS as opposed to the traditional earnings per share figure with gold and silver stocks because it better describes (at least to me) whether a miner has the funding to expand existing mines, explore new areas, and pay down debt. With that said, a majority of gold stocks are valued at well below 10 times CFPS on a forward basis.
I'm not trying to be purposefully biased here, but a personal portfolio holding of mine, SSR Mining (TSX:SSRM), is a shining example. SSR Mining acquired Claude Resources and the Seabee Mine in Canada back in 2016, with production from Seabee hitting a record high in 2016, and again last year. It also has the flagship Marigold mine in Nevada, which is expected to see expanded production of perhaps 20% to 25% through 2022, and the Chinchillas Project in Argentina, which should commence commercial production of silver in the second half of this year. Wall Street anticipates that SSR Mining could generate in excess of $2 per share in CFPS by 2021, implying around 100% upside in the stock over the next three-plus years.
Values abound in the gold industry, and investors shouldn't fear this recent move lower in physical gold prices.