Gold Drops on Shutdown

10/02/2013 11:00 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

The government shutdown didn't send fears soaring nor gold prices climbing as many traders and investors had hoped, writes MoneyShow's Jim Jubak, also of Jubak's Picks, but he thinks gold miners are now willing to consider taking a second glance at another metal as a result.

Traders and investors, who were hoping that a government shutdown and a possible US default if Congress doesn't raise the debt ceiling would send fear soaring and gold prices climbing, have got to be disappointed at yesterday's action. Gold prices were down yesterday, with the December contract falling to $1287 an ounce for a drop of 3.04%. That's the biggest drop since July 5.

And it doesn't look like the market for gold is headed for a quick turn—short of a zombie attack on world population centers.

Holdings of gold bullion are down, with gold held by bullion ETFs falling 27% in 2013 to the lowest level since May 2010.

Yesterday, Fitch Ratings threw in the towel on $1200 an ounce, as a floor for the market. “We do not see $1,200 an ounce as a price floor,” Fitch wrote, “because recent price trends have been influenced far more by the use of gold as a financial instrument and a hedge against inflation than by industrial demand. Given the change in sentiment, as central banks signal unwinding of economic stimulus, we recognize it is possible that the gold price could find a new floor below this level for an extended period.” A decline in the price of gold to $1,000 an ounce, Fitch continued, would put the credit ratings of some gold miners under significant pressure.

And, as if to underline the Fitch report, Newmont Mining (NEM), the largest US gold miner, has joined the race to buy Glencore Xstrata's Las Bambas mine in Peru, according to the Financial Times.

The most important element in that story is that Las Bambas is a copper mine and not a gold mine. Up until this point in the current cycle, gold mining companies have not been active in adding copper assets to their existing gold holdings, because such copper acquisitions would lower the multiple that financial markets assigned to their stocks.

Apparently gold miners are at least willing to rethink that logic now.

As of 3:00 PM New York time yesterday, shares of Newmont Mining were down 3.65%; Goldcorp (GG) was lower by 2.85%; Yamana Gold (AUY) was off 2.84%; Barrick Gold (ABX) had dropped 3.17%, and Randgold (GOLD) had declined 1.37%. Goldcorp and Yamana Gold are members of my Jubak's Picks portfolio.

Full disclosure: I don't own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did own shares of Yamana Gold as of the end of June. For a full list of the stocks in the fund as of the end of June see the fund's portfolio here.

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