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Why Gold Stocks Are Plunging Today

By Matthew DiLallo - Feb 28, 2020 at 5:14PM

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Gold has lost its luster as the market sell-off continues.

What happened

The price of gold sold off along with the broader market today, dropping nearly 5% on the day, which was its sharpest decline since 2013. That sell-off weighed on gold mining stocks, with several tumbling by double digits. Leading the decliners were Harmony Gold (HMY -1.52%)Sandstorm GoldNovaGold ResourcesAngloGold Ashanti (AU -1.65%), and New Gold (NGD -1.71%)

So what

The price of gold typically rallies when the market tumbles. That had been the case recently as the price of gold surged as investors bought gold and gold-related stocks on fears that the COVID-19 coronavirus outbreak would impact the global economy. 

A red line moving down with gold nuggets in the background.

Image source: Getty Images.

However, investors have since started cashing in on their gold gains to raise cash and cover losses in the market. Further, gold investors now think that central banks will work to stimulate economies due to worries of deflation, which is bad for gold since it thrives on inflation.

The slump in the price of gold is weighing on gold mining stocks. That's because they'll make less money on their gold production if the precious-metal's price stays lower.

Harmony Gold, for example, has lots of leverage to higher gold prices. If the average price of gold is 5% above the company's projected baseline level of $1,480 an ounce, its operating cash flow rises 29%. Meanwhile, a 15% increase in the average price of gold from its baseline would drive an 89% improvement in its cash flow. That leverage to the price of gold, however, cuts both ways. If gold falls, so does Harmony's profit, which is why its stock is tumbling today.

Meanwhile, higher-cost gold miners like New Gold would struggle if the precious-metal's price keeps falling. The company anticipates that it would cost between $1,260-$1,350 to produce an ounce of gold this year. While that's well above the current price, gold traded in that range around this time last year. As such, the company could lose money if gold were to continue giving up its recent gains.

For comparison's sake, AngloGold Ashanti has much lower gold costs. During the fourth quarter, it's all-in sustaining cost to produce an ounce of gold was $992, though it sees that number rising to $1,040-$1,100 an ounce this year. Still, with its lower costs, the company can make money if gold falls back to last-year's level.

Now what

The price of gold has run up a lot over the past few months and it peaked earlier in the weak due to increased concerns surrounding the COVID-19 coronavirus outbreak. However, with the stock market's sell-off intensifying as the coronavirus spreads, investors are cashing in on their gold gains.

That weakness could persist until there's some clarity on how much the outbreak will impact the global economy. Because of that, gold might not be the safe haven investors had hoped it would be during this increasingly uncertain time.

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Stocks Mentioned

AngloGold Ashanti Limited Stock Quote
AngloGold Ashanti Limited
$15.46 (-1.65%) $0.26
Harmony Gold Mining Company Limited Stock Quote
Harmony Gold Mining Company Limited
$3.24 (-1.52%) $0.05
New Gold Inc. Stock Quote
New Gold Inc.
$1.15 (-1.71%) $0.02
Sandstorm Gold Ltd. Stock Quote
Sandstorm Gold Ltd.
$6.19 (-0.64%) $0.04
NovaGold Resources Inc. Stock Quote
NovaGold Resources Inc.
$5.37 (-1.10%) $0.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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