On Monday, gold prices struck a four-month high of $1,354.80 an ounce as tensions in Ukraine escalated. Prices eased on Tuesday, falling more than 1%, after Russia ordered its troops to return to their permanent bases. With tensions in Ukraine easing, gold's safe-haven rally seems to have ended for now. However, this is a crucial week for gold as investors await the all-important nonfarm payrolls data, which is scheduled to be released on Friday. Weak nonfarm payrolls data could further boost the already improving outlook for gold and mining companies.
Gold sees a pullback
While the crisis in Ukraine has been ongoing for nearly four months now, it escalated in February. Between February 1 and Monday, March 3, gold prices gained 7%. The likes of Goldcorp (NYSE:GG), Kinross Gold (NYSE:KGC), and Barrick Gold (NYSE:GOLD) also rallied, gaining 8.19%, 13.97%, and 5.71%, respectively. After touching a four-month high on Monday, gold slipped more than 1% on Tuesday. Prices could slip further if the geopolitical tensions continue to ease. However, a weak U.S. jobs report on Friday could result in the Federal Reserve slowing down the pace of tapering its bond purchases. This could boost gold prices.
All eyes on nonfarm payrolls
The Labor Department is scheduled to release the crucial nonfarm payrolls data for February later this week. Recent economic data in the U.S. has been mixed. Some of the weak economic data, including December's and January's nonfarm payrolls, has been blamed on the extremely cold weather. As a result, the Fed, under its new Chair Janet Yellen, has not shown any intention of the central bank slowing down the pace of its tapering so far. However, if the February jobs report also falls well short of expectations, the Fed might be tempted to slow down the pace of tapering at its March 18-19 FOMC meeting.
Outlook for gold and miners improving
While a slowdown in tapering could boost gold prices in the near term, the outlook for gold and gold mining companies has been improving even without the Fed's moves. This is mainly thanks to strong physical demand in China. As I have noted before, a pullback in gold prices boosts demand for the precious metal in China as was the case in 2013. With China continuing to shift from an export- and investment-led to a consumption-led economy, the trend could continue. This has, as I have said in a previous article, created a floor for gold prices. If the jobs report on Friday disappoints and the Fed slows down its tapering, it will further improve the outlook for gold.
Another positive has been gold ETFs, which are showing signs of stabilizing. Gold ETFs saw significant outflows in 2013 as sentiment turned bearish on the precious metal. According to data from the World Gold Council and Thomson Reuters GMFS, gold-backed ETFs saw their holdings drop by 881 tons. However, Reuters noted late last month that the SPDR Gold Trust ETF, the world's largest gold-backed ETF, was likely to show an increase in its holdings in February, the first in over a year. The outlook for gold has certainly improved in the wake of some weak economic data, but any future moves would depend on what the Fed does in its March meeting. Of course, safe-haven rallies, like the one seen in February, could boost prices in the short term.
For miners, though, it is important that they continue with their cost-cutting measures. Goldcorp last month said that its all-in sustaining costs for 2013 were $1,031 an ounce. However, Chuck Jeannes, President and CEO of Goldcorp, said that most mines in Goldcorp's portfolio ended the year with significantly lower all-in sustaining costs than when the year began. The company expects to decrease its all-in sustaining costs to between $950 and $1,000 an ounce this year. Goldcorp has also cut its proven and probable gold reserves by 15%. Proven and probable reserves at the end of 2013 stood at 54 million ounces, based on gold price assumption of $1,300 an ounce. Given the current price level of gold and the outlook; gold prices could average $1,300 an ounce. Therefore it is likely that Goldcorp will not see any writedowns when the company reports reserves next year.
Barrick Gold has been even more conservative when calculating its reserves. The company's gold reserves of 104.1 million ounces at the end of 2013 were based on a gold price assumption of $1,100 an ounce. Barrick also expects all-in sustaining costs to be between $920 and $980 an ounce in 2014.
I had been bearish on gold, as well as mining companies, at the beginning of the year. But recent developments such as strong physical demand in China and stabilizing ETFs in the wake of some weak economic data in the U.S. have improved the outlook for gold. A slowdown in tapering from the Fed could further boost the outlook. But even without any help from the Fed, gold prices could average $1,300 an ounce in 2014. All these, combined with cost-cutting measures, make gold mining companies worth a look.