Any Signs of a Bottom for Gold?

12/18/2013 12:01 am EST


Jim Jubak

Founder and Editor,

A recent development in one of the gold mining stocks indicates to MoneyShow's Jim Jubak that the decline in gold, and the gold mining stocks, is not over yet.

Okay, so there are a lot of people out there, a lot of gold bugs, a lot of inflation bugs, trying to figure out, okay, where's the bottom in gold, when does the gold sector—gold prices themselves stop going down, when do gold mining stocks go down?

Well, we had another bad leg, bad news from the gold mining sector, on December 11 that indicates, well, we're getting closer, but we're still not there. The bad news came out of a gold mining company called IAMGOLD, symbol (IAG), and, basically, what the company said is it was going to suspend its dividend. Now, gold mining stocks added dividends, as a way to compete with gold ETFs. Used to be that they didn't pay anything, but the idea was, if a good mining stock paid like 1%, 1.5%, and a gold ETF, where you held bullion, didn't pay anything at all, it made the gold mining stock more attractive, so, we're really unwinding a relatively recent development in the gold mining sector, where companies started to pay dividends, and now they're going back to not paying dividends.

What's important is why, and what you're getting from companies, like this, and from American Barrick (ABX) and Newmont Mining (NEM), is a sense that companies are cutting their dividends because they've got to save cash, because they're trying to get through a tough spot.

You know, the price of gold is falling, but the cost of producing gold is not falling nearly as quickly. Companies are trying to cut costs, but what they don't want to do, what they don't want to do desperately, is to have to go back into the equity market at this point, equity or debt market, and try to raise more cash, more capital, so they can keep going, so what you're really seeing is companies trying to conserve cash, so this is yet one more sign that we're not through this bottom, that gold mining companies are still thinking that they're going to see falling prices.

You get—along with a dividend cut like this, dividend suspension like this—you get the company also saying, “Well, we're going to continue to try to cut production costs,” and then to remind you, so that you don't get really, really scared, say, as they did, well, we've got a credit line with $750 million still in it that's not touched, so we're really not running out of cash, this is a preemptive, this is a move meant to make sure that we don't get into trouble, but, basically, as long as you're seeing this kind of gold mining companies, it's an indication that we're still looking for a bottom here, both in the yellow metal and in the sector as a whole.

This is Jim Jubak for the video network.

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