Gold and gold miners likely cannot wait for 2013 to end. This was the year that bullion’s 12-year bull market ended in resounding fashion.
The SPDR Gold Shares (NYSEArca: GLD) has tumbled 27.7%, but gold miners have been far worse as the Market Vectors Gold Miners ETF (NYSEArca: GDX) has slid nearly twice that amount, or 53.8%. Still, gold miners have some fans heading into the new year on the basis that the group is inexpensive on valuation and that sectors that lag one year often turn into the next year’s leaders. [Friend Fear With ETFs]
That theory merits some caution because falling gold prices could force already embattled miners to take additional asset writedowns. Predictably, lower prices crimp miners’ bottom lines and make it too costly to continue producing gold at some mines. Although GDX’s holdings have various points of pain at which it becomes uneconomical to produce more bullion, the longer gold resides below $1,200, the expectation is that more miners will be forced to scale-back output. [Trouble Looms for Gold Mining ETFs]
Reserves are integral in valuing gold miners because if miners do not replace what they extract from the earth every year, they would shrink and, until recently, rising prices have led to some rosy assessments, reports James Wilson for the Financial Times.
The FT points out that Barrick Gold (NYSE: ABX) and Newmont Mining (NYSE: NEM) based recent reserve estimates on gold prices of $1,500 and $1,400 per troy ounce, respectively. Gold is currently trading just over $1,200 an ounce. Barrick and Newmont are GDX’s largest and third-largest holdings, combining for nearly 23% of the ETF’s weight.
Kinross (NYSE: KGC) based its latest reserve estimate on $1,200 per ounce, according to the FT. That is GDX’s ninth-largest holding at a weight of 4.2%.
One analyst told the FT that silver miners are not immune from writedowns either because their reserve assumptions are also well above current market prices. The Global X Silver Miners ETF (NYSEArca: SIL) is down 50.5% this year.
Market Vectors Gold Miners ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of GLD.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.