Editorial: Whither gold?

Gold is a wonderful symbol of indestructible beauty, but all kinds of gold investment strategies have been going down in flames this year.

At press time, spot gold is trading at US$1,558.70 per oz., a decline of 6.3% from the end of 2012. Silver prices are simpatico, having fallen 7.8% this year, though platinum prices are unchanged, due to this year’s labour strife at the big mines in South Africa. Palladium prices are actually up 2.7% this year.

By the end of March 2013, gold prices had dropped for two consecutive quarters for the first time since gold’s dark days in the first half of 2001.

Gold is now down 16% from its record nominal highs of US$1,888.70 per oz. achieved on the Comex in August 2011, or getting near the 20% mark that traditionally delineates the start of a bear market, even within an overall secular bull market. On the other hand, it’s never far from mind that today’s gold prices are more than fivefold of those endured in mid-2001.

The casualty count among the gold miners and juniors is heavy, with their leverage to gold prices cutting both ways. Year to date, the share prices of the biggest North American-traded gold miners are a shareholder’s nightmare: Barrick Gold is off 29%; Iamgold, -43%; AngloGold Ashanti, -29%; Kinross Gold, -26%; Yamana Gold, -16%; Goldcorp, -13%; and New Gold, -23%. Junior miners and explorers are mostly worse, with some debt-free companies even trading below the value of their cash treasury, just like in the bad old days of the late 1990s.

Meanwhile the S&P 500 Index is up 11% this year, and the Dow Jones Industrial Average’s rise is even higher, at 13%. The conclusion is pretty clear: in 2013, the smart money includes those who ditched gold mining stocks and jumped with both feet into U.S. blue-chip stocks.

At press time, Goldman Sachs has turned even more bearish on gold, and is now predicting gold will end the year at US$1,450 per oz., with its 12-month outlook slashed to US$1,390 per oz.

That’s well down from its previous bearish prediction of US$1,600 per oz. delivered just six weeks ago, which had been a major about-face from its earlier bullish prediction of US$1,810 per oz. for 2013. Even worse for gold enthusiasts, Goldman Sachs is now recommending shorting gold.

One brutal rule of stock-market investing is that if there are no more compelling reasons for a stock price to keep rising, its price will not stabilize for a long period at a high level because savvy investors will exit the investment in search of the next rising investment, or at least the safety of cash or T-bills.

Unfortunately for gold investors, the classic reasons for investing in gold in the new millennium — flat global gold production combined with heavily indebted governments sorely tempted to pay for wars and vast, unfunded social liabilities by drastically devaluing their currency — have been widely understood and by all appearances already priced into the yellow metal, especially since the 2008 global financial crisis exposed to all the rotten core of much of the Western World’s banking system.

More recent worries about Cyprus and the vanishing sanctity of bank accounts in that country gave gold bugs momentary exhilaration in March. But the wider lesson coming out of that episode wasn’t that bank accounts around the world are subject to partial confiscation at any moment, but rather the more prosaic one that it’s probably not wise to put money in a Cypriot bank. (More than a few global mining companies direct overseas mining profits through Cyprus on their way back home, but the miners have been silent on the issue of Cypriot banking problems.)

Thankfully, with investing there is a kind of redemption possible, as the questions always circle back to two simple ones: OK, that may have been bad, but what comes next? And how do we profit from this insight?

• Quebecers often look to father France for inspiration and direction in the cultural, economic and technological realms. But that sure doesn’t translate to France’s long and deep attachment to nuclear power, as seen in the Quebec government’s surprising new moratorium on uranium mining in the province.

It was a sucker punch for Montreal-based Strateco Resources, which has spent $120 million developing its high-quality Matoush uranium project in the Otish Mountains into what could have been, and could still be, Quebec’s first uranium mine.  Strateco shares dropped 62% on the news to 4.5¢, but since rebounded to 7¢ for a market capitalization of $12 million. The stock peaked at $3.78 in early 2007.