Gold has not been performing well for the last few months. We can observe that by looking at the Gold ETF (GLD), which has lost 10% in value since mid fall of 2012 when it started to move down. Mining stocks like Barrick Gold Corp (ABX) have fared even worse. It has lost about 23% of its value over the same period. As 2013 continues to unfold, these are my thoughts as how the metal and mining companies (particularly junior mining companies) should be approached from an investor's perspective.
Is there a correlation between the equity and precious metals market?
Since 2013 started, one can observe the S&P 500 (SPX) has increased close to 10% in value while gold is down more than 9%. Gold mining stocks are down twice that of the metal and silver has not fared any better. This has given us a negative correlation between the two in the last few months. Some precious metal experts are of the opinion that the bearish trend of precious metals and mining companies will not end until the present bull market ends for the equity markets. Can we observe some signs of when this might happen? A recent article by Jordan Roy-Byrne addresses warnings for the S&P 500's recent run. This is what he writes:
"…precious metals, commodities and the US Dollar is now, we think, signaling a warning for the equity market. The bond market needs to confirm this warning and if it does it could be the catalyst for a sell-off in equities."
And it just so happens that the S&P 500 is nearing strong long-term resistance. Is it coincidence?
My Thoughts on Gold Prices in 2013
Let me establish a reason gold as a whole could end 2013 lower than when it started. The news that the economy is slowly recovering is not new. The pace is slow, there is no doubt about that, but the recovery is fighting its way into reality. I believe when Federal Reserve Chairman Bernanke senses strong growth in the recovery, the liberal monetary policy will also wind down and the cash supply will not circulate as freely as it has in the past. Let's face it, the things that we were facing with our economy and the European collapse is just not happening. It seems as we are in a state a transition between good and bad when it comes to recovery. It is almost like we are "beginning" to recover and Europe looks like it is "beginning" to move away from collapse.
This transition has gold in a quandary as to which way it should move. The global economy is still frail enough that it could easily turn down, but the energy and fight is toward recovery. So gold moves along sideways and as the recovery gains steam, this will put more pressure on gold to choose to move down as our crisis which started in 2008 appears to be coming to an end. Since this crisis lead gold's charge in the first place, it would make sense that the price of the metal would now ease a bit. Investors will no longer be looking to gold as an investment against the perils of global failure. These are my observations as to why gold has a good chance to move down for the year.
Junior Mining Stocks in 2013
Junior mining companies have seen funds migrating away from them as investors consider risk while the economic transition, creating uncertainty. This may be one of the challenges they face. Junior mining companies are finding it hard to get financing for some of their projects. Some analysts believe this "collision" between financing and projects will continue and "juniors" are just going to have to be patient. Some analysts believe the there is a glut of these companies out there right now and some will die off while others may morph into a more balanced approach, refocusing on other revenue sources like industrial metals.
It is a hard thing to figure out if investing in junior mining companies is a good move right now. Not only do investors have to consider "property" and the grade of the ore but the financial window is tight for these projects and the market as a whole is not sending money to this market as liberally as it once did. It is almost as if the market is calling out for consolidation before it stops being a scrooge. If you know anything about the industry, look for the best projects out there. If they are not financed yet, they will be. Overall, I think the year is once of consolidation via merger or what have you.
The equities market may be coming to a high before it takes a turn down sometime this year, but I do not believe that it will be a catalyst for a huge gold rally from what I am observing so far. I believe this is a year of consolidation for the industry which includes metal prices as well as mining companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.