Oof! That's the collective sound gold traders made Monday as the precious metal tumbled 3.1%, or $40, to $1,289 per ounce as the government shutdown slammed prices with a blow to the solar plexus. With the government's closure coming as it did just as China's Golden Week national holiday began, and which runs through Oct. 9, there was even less demand available in Asia.
While investors might think such a financial crisis would be a prop for traders to turn to gold as a safe haven, the more cynical among us -- and apparently among traders, too -- see this latest showdown in Congress as a manufactured drama that will not last very long. A deal will be reached to raise the debt ceiling and any fallout will be short-lived.
Yet that very act is why investors might not want to abandon hope for gold's recovery. Raising the debt limit will simply add to the house of cards Congress is building, and if there's damage incurred to the economy as a result, hopes for the Fed to taper its quantitative easing program will fade. Together they provide support for gold's return as a hedge.
Although gold prices bounced back a bit in trading yesterday, the precious metal has still lost nearly a quarter of its value this year, putting it well along the path to not recording any gains for the first time since 2000. That in itself has created havoc among gold miners who've been forced to write down the value of their quarries.
Where Kinross Gold (NYSE:KGC) got the ball rolling earlier this year when it took a $3.1 billion charge on its Mauritania operations, Australian miner Newcrest Mining took it to a new level by writing off $5.5 billion on its mines in Papua New Guinea, the Ivory Coast, and Australia, as well as believing it will need to devalue them as much as 25% by the end of the year. It was the largest such revaluation in history.
And while not completely related to gold's price, but Barrick Gold (NYSE:GOLD) had to write down a like amount on its Pascua-Lama project in Chile while announcing it anticipated taking further, unspecified but "significant" charges later on. Newmont Mining (NYSE:NEM) took a $1.61 billion writedown on its Hope Bay mine.
Yet not everyone was writing down assets. Yamana Gold (NYSE:AUY) and Agnico-Eagle Mines (NYSE:AEM), for example, avoided having to take any impairments last quarter. But according to Bloomberg, the total amount of writedowns thus far this year amounts to some $26 billion. And though it didn't take any charges yet, Yamana did report a near $8 million loss. It's not an environment without consequences.
The risk, of course, is that the writedowns turn into write-offs, suggesting the mines not only have reduced value, but no economic value. If gold prices slump as low as some analysts say to about $1,000 per ounce, that becomes a very real possibility. When it no longer is economical to mine gold at a particular project, it's written off on the balance sheet as having no value.
There may be more pain ahead with gold's pricing, but now that India has clarified rules on importing the precious metals, which previously had the effect of freezing all imports -- they were around three tons in August and seven in September -- analysts expect them to surge to 30 tons this month, providing even more support for the bull thesis to run over the bears.