Gold mining stocks ended 2013 on a bright note, with the NYSE Arca Gold Miners Index closing more than 2% higher. Shares of major gold mining companies such as Barrick Gold (NYSE:GOLD), Goldcorp (NYSE:GG), and Newmont Mining (NYSE:NEM) gained on the final trading day of the year. However, overall, 2013 was a disastrous year for gold miners as gold prices fell sharply.
For the year, Barrick Gold fell more than 48%, Goldcorp fell more than 39%, and Newmont Mining fell nearly 49%. Gold mining stocks struggled as gold prices dropped nearly 30% in 2013, ending a 12-year winning streak that saw prices appreciate more than 500%. Gold mining stocks struggled even as the S&P 500 registered gains of around 30% in 2013. The big question is how gold mining stocks will perform in 2013. This would depend on gold prices. Given the outlook for gold, I expect another challenging year for gold mining stocks.
Gold prices to remain under pressure
The outlook for gold in 2014 is bearish. Gold is seen as a hedge against inflation. However, expectation of inflation in the developed world, including the U.S., is quite low. This despite the ultra-loose monetary policy measures implemented by developed world central banks.
Gold's appeal as a safe-haven asset has also been dented as the global economy has shown signs of improvement. At the start of 2013, there were concerns over a hard landing in China. However, the Chinese economy has shown signs of stabilizing. The euro zone is also recovering. Finally, the U.S. economy has continued its recovery.
The improvement in the U.S. economy has even prompted the Federal Reserve to start easing its bond purchase program, which has been one of the major reasons behind gold's ascent in recent years. In its last meeting, the Fed said that it will start tapering its bond purchases from January 2014, and continue to do so every month if the economy remains on track.
Demand from India, one of the major consumers of gold, is also expected to remain subdued.
Given the current scenario, gold prices are expected to struggle in 2014. This would mean another disappointing year for gold mining stocks.
Losses to continue
The gains in gold mining stocks had been more or less similar to those seen in gold prices during the precious metal's decade-long bull run. However, their performance was worse than that of gold when prices were falling last year. While gold fell around 30% in 2013, the NYSE Arca Gold Miners Index dropped more than 50%. This trend, combined with the outlook for gold prices in 2014, means that miners such as Barrick Gold, Newmont Mining, and Goldcorp could see significant losses this year.
Another concern for gold miners is a drop in reserves due to a sharp decline in gold prices. At the end of 2012, Barrick Gold's estimated proven and probable reserves totaled 140 million ounces. The reserves, however, were calculated using an assumed long-term average gold price of $1,500 an ounce. Newmont's estimated proven and probable gold reserves at the end of 2012 stood at 99 million ounces. The company calculated its reserves using an assumed gold price of $1,400 an ounce. Gold prices are now down some $300 an ounce from Barrick Gold's assumed average gold price and $200 from Newmont's assumed average gold price. Therefore one can expect some adjustment when the companies release their next reserve statement.
Gold miners are also facing margin pressure. Record-high gold prices had prompted mining companies to undertake projects with higher all-in sustaining costs. With prices at around $1,900 an ounce, this was viable. However, at current levels, gold mining companies face significant margin pressure. In its third-quarter results, Goldcorp had reported all-in sustaining costs of $992.25 per ounce. Barrick Gold and Newmont also reported similar all-in sustaining costs in their third-quarter.
Is there any value in gold miners?
There would be if gold prices were to rebound sharply this year. The only way that can happen is if there is inflationary pressure. However, despite the ultra-loose monetary policy measures from developed world central banks, recent data from the U.S., euro zone, and Japan suggests that there is risk of deflation rather than inflation. If India lifts its curb on gold imports there could be robust demand from the country. But that would only provide some support to gold prices. In such a scenario, I don't see any value in gold mining stocks.