The U.S. central bank is less likely to tighten its easy monetary policy amid poor economic data and instability on Capitol Hill. Economists expected the Federal Reserve to reduce quantitative easing in December, but lagging job growth could push "tapering" to March 2014. With lower interest rates and monetary base growth, U.S. dollar deterioration looms. Investors have pulled away from the weakening greenback and moved into gold and gold-backed securities such as SPDR Gold Shares (GLD +0.23%) to protect their portfolios from volatile currency fluctuations.
U.S. jobs data suggests no taper
The U.S. Department of Labor recently reported an increase in September U.S. nonfarm payrolls of 148,000, which missed expectations of an additional 180,000 jobs. The unemployment rate fell to 7.2% from 7.3% in August, signaling little improvement in the rate of job creation. The data supports the market's expectations that the Fed will wait until next year to begin drawing down its $85 billion-per-month debt-buying program, thus weighing down on the U.S. dollar and bolstering the gold market for now.
US Change in Nonfarm Payrolls data by YCharts.
The government shutdown and debt ceiling debate in mid-October significantly slowed down U.S. economic growth and hurt consumer and business confidence. Economists estimate that the risk events in Washington cut about 0.6% off annualized fourth-quarter GDP growth, according to Thomson Reuters. Nonfarm payrolls for October could disappoint both the Fed and market watchers.
S&P 500 reaches new highs, and gold rises amid weak dollar
Fed Chairman Ben Bernanke has stated his intent to keep interest rates low until the unemployment rate falls below 6.5% and inflation remains low and stable at 2.5%. Equity investors look to benefit from the Fed's easy money policy and have flocked to the SPDR S&P 500 Index (SPY +0.78%) exchange-traded fund for exposure to large companies listed on the New York Stock Exchange and the NASDAQ.
The S&P 500 index soared to record highs on strong third-quarter corporate-earnings growth. Earnings should continue to grow into next year as low interest rates continue to expand companies' price-to-earnings multiples. Meanwhile, the ETF has seen net inflows of more than $4 billion so far in the fourth quarter. Net inflows reached $6.5 billion in the third quarter.
This chart highlights the one-month price movements in the U.S. dollar index (^DXY), the SPDR Gold Shares (GLD +0.23%) ETF, and the SPDR S&P 500 ETF.
The U.S. dollar recently fell to its lowest levels against the Euro in nearly two years because of the prolonged monetary stimulus. The volatility in the U.S. dollar attracts investors to gold, which has been a dismal investment since entering a bear market in April. The Fed's loose monetary policy weakens the U.S. dollar and strengthens gold as a hedge against currency risk.
SPDR Gold Shares provides investors exposure to gold without the vagaries of the gold futures market. Strong demand from China, India, and international central banks could help gold break out of its slump. The ETF recorded net outflows of $2.5 billion in the third quarter, up from $11.5 billion in outflows in Q2. Gold miners have drifted into oversold territory because of plunging gold prices, but a recovery in gold could reverse investor sentiment.
Let's look at one gold miner in particular that's poised for long-term outperformance.
Agnico Eagle poised for long-term growth
Agnico Eagle Mines (AEM +1.85%), the fifth-largest Canada-based gold-producer, reported strong third-quarter earnings on record gold-production and lower operational costs. The company produced 315,828 ounces of gold at a total cash cost of $590 per ounce, compared with 224,089 ounces at a total cash cost of $785 per ounce last quarter. Agnico's Meadowbank mine in Nunavut, Canada, contributed about 42% of the company's quarterly gold output.
| Metric |
Q3 2013 Result |
Wall Street Consensus Estimate |
|---|---|---|
|
Cash |
$141.7 million |
-- |
|
Revenue |
$444.3 million |
$374.9 million |
|
Earnings per share |
$0.35 EPS |
$0.07 EPS |
Source: Agnico Eagle.
Miners across the gold sector have initiated cost-restructuring programs to limit exposure to cost inflation. Inflationary activity in material costs and falling gold prices have dented gold producers' earnings. Agnico recognizes the urgency to reduce costs at mines to preserve financial flexibility. Management slashed capital and operating costs by $50 million and exploration spending by $20 million for fiscal 2013.
Agnico's cost-cutting program will carry into 2014 with capital and exploration spending reductions of $200 million and $50 million, respectively. Management forecasts all-in sustaining costs -- the true cost of producing an ounce of gold -- of $1,025 per ounce for fiscal 2013, down from previous guidance of $1,100 per ounce. With gold prices expected to soar higher on news that the Fed won't taper this year, Agnico's cost savings could bolster future quarterly profit margins and cash flows.
Bottom line
Investors should look into gold miners that have strong cost controls, production growth, and effective management. Agnico Eagle presents favorable profit and cash-flow growth from its mining operations. Agnico's Goldex and La India mines could provide additional growth when they start commercial production in the coming quarters. Gold miners with disciplined cost structure will benefit the most from rising gold bullion prices. If fiscal instability deepens, the U.S. could face a loss of credibility and hurt the value of U.S. dollar.
