Source: Wikimedia Commons.
A bit of good economic news, coupled with reports of slackening Chinese demand, sent the price of gold tumbling yesterday more than $25 an ounce, or some 2%, and dragged down with it shares of the yellow metal's miners. The worst performers were IAMGOLD, Agnico-Eagle Mines (AEM 1.10%), and Gold Fields, which fell 4%, 6%, and 7%, respectively.
The Commerce Department reported surprising strength in the manufacturing sector of the economy as durable goods orders -- things that are meant to last at least three years like appliances, non-military aircraft, fabricated metal products, and electrical equipment -- rose 0.8% in April against expectations they would fall by a like amount. Driven in part by higher consumer confidence due to stocks and home prices continuing their climb, a picture of a seemingly healthier more robust economy was the good news weakening the underpinnings of gold, which is often viewed as a safe haven in troubled times.
Of course, that's tempered expectations that capital spending plans by business will fall as non-defense capital goods orders, excluding aircraft, fell 1.2% after jumping 4.7% in March after revision, the largest gain since November. Such orders are closely watched because they serve as a proxy for business spending plans.
With things looking up here at home, China's appetite for gold apparently was waning at the same time. Reuters reported gold imports from Hong Kong fell in April to their lowest level since February of last year, and not even the big drop in the price of gold piqued their interest. It marks the second straight month of falling imports and analysts think gold could fall even lower as a result.
Mix good times with poor buying conditions and you've got a prescription for falling shares, even among the biggest gold miners, which all dropped by a rate exceeding that of the metal itself. Goldcorp (GG), the biggest miner by market cap at $19 billion, dropped almost 4% on the day, though it remains 10% higher than where it started the year. Some of its softness was related to its attempted hostile takeover of Osisko Mining. It ended up walking away from the brutal battle for the potentially lucrative Canadian Malartic mine in northern Quebec after the junior miner received a combined white knight bid from Agnico-Eagle and Yamana Gold (AUY). It's noteworthy perhaps that Yamana was down more than 4% yesterday, though Osisko itself held up comparatively well, dropping less than 3%.
Barrick Gold (GOLD 1.08%), which fell 3.5%, can't win for losing these days. It's embroiled in a number of recently filed class action lawsuits over its crippled Pascua-Lama project in Chile, where the miner allegedly misrepresented its adherence to environmental regulations, which caused substantial harm to investors after it wrote down billions of dollars on the asset and put the project on hiatus. It's also subject to significant fines from the government for violating the rules.
Even when it tried to turn the tide of sentiment against it by buying rival Newmont Mining (NEM 1.24%), it dug itself into a hole by having outgoing Chairman Peter Munk issue a broadside against its target, calling them difficult to work with and not friendly to shareholder interests. As the two were still in negotiations, Newmont was offended at having the dirty laundry aired in public and permanently withdrew from further discussions. Newmont's stock was down 3% yesterday, but it remains dysfunctional. Although its stock is essentially unchanged so far this year, it's down more than 26% over the past 12 months and had the distinction of being the worst-performing stock in 2013.
While there was blood in the streets yesterday in gold, I still expect a rally. There are still plenty of discordant signs of economic instability here at home and China's economy is proving itself to be unstable. If it falters further, that would likely drag down Europe's economy with it, and if it's unable to continue to buy U.S. debt, things could become unhinged here. The carnage in pricing should serve as a signal for investors to buy, if not the miners, then certainly the metal.
