Why Did Gold Rally?

07/29/2013 6:00 am EST

Focus: COMMODITIES

Jim Jubak

Founder and Editor, JubakPicks.com

Gold has had a pretty good run in the past month and Moneyshow's Jim Jubak discusses why the rally occurred and what he sees going forward.

The gold rally is over and not only may you have missed it, but you may not even have noticed it was happening.  We really hit a low around the 26th of June or so both in gold stocks and in the price of gold, and we’ve had a really nice one-month rally. 

Gold stocks and the price of gold themselves gave back a lot on July 24 and it looks like this rally is over for a little bit.  I’ll try to explain why.

In terms of physical gold, the rally was based on the thought that prices got low enough and the kind of background was benign so you get a bounce; that’s really what this was.  The bounce has come to an end because you’ve had a pretty good move up on the dollar around the 23rd the 24th of July.  You’ve had a stronger economy since that gold has no inflation to speak of, the economy is strong so you don’t need to hide in gold and with all that going on and the dollar going up gold was down when the dollar was up – end of the gold rally, physical gold.

In terms of the gold stock rally, it’s really been very, very strong.  It’s been kind of a stealth rally.  People haven’t realize it’s been going on.  Stock like gold miners like Gold Corp. moved up a little over 33% from the 26th of June to the 23rd of July.  That’s a big move for a month.  It was because these stocks have been hammered on fears that they are not going to be making any money, they’re going to be canceling projects, they’re going to be announcing lots of write-offs.  Again, the price was so low that these things looked really attractive.  When you’ve got a company like Humana which has some of the lowest costs in the industry, trading like at 9.80/9.90 a share where a reasonable fundamental target might be more like 13, 14, 15; buying at 9.90 it looks like a good deal. 

What has caused this to come to an end?  The same factors that led the price of physical gold to come to an end certainly come into play, but there is another one which is that starting on the 25th of July you have a week of very, very concentrated earnings reports from Gold Corp., from Humana, from Kinross, from Newmont, from Barrick Gold; all of the big guys are going to report in this week-long period.  The fear is that they’re going to do a lot of write-offs.  They’re going to do write downs because of canceled mine projects or delayed mine projects and they’re going to have a lot of write downs because the value of the assets that they hold; the gold that they have and the gold that’s in the ground has really gone down because you’ve seen gold fall from $1600 or $1700 an ounce down to 13 or 12.  That means that at some point you need to reassess what this gold is worth that you have on your books. 

The fear is that going into this we’re going to get a lot of charge offs and that just introduces a lot of uncertainty into this and it’s not any real surprise that the first of those which is Gold Corp. reports before the market opens on the 25th which as I remember the calendar is the day after the 24th which is when you had the first big drop.  How big was the drop?  Well, if you’re looking just at gold itself, physical gold, Spot Gold dropped by about 2.4% on that day.  The gold mining stocks were showing drops 5%, 5.5% almost 6% on the day so you see where the leverage and the fear is in this market. 

If you’re going to be interested in buying gold for the longer term, you like it as a hedge I suggest that you wait and see how big the write-offs are.  What you’d really like is a kitchen sink quarter where they write off everything that you can think of including the value of the CEO’s dog and throw it all on the books and get it all out of the money.  I doubt that’s going to happen.  If it does, I would buy.  If it looks like they’ve got more write-offs coming down the road, you want to wait a quarter or two.

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