Gold Has Lost Its Mojo

Nur is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Gold was one of the top investment choices for the last decade. People who bought gold at the beginning of the decade earned impressive profits. Even though there were downturns in price, most were short term. However, gold has lost its mojo, and is trading almost 20% below its previous high. Gold ETFs, like SPDR Gold (NYSEMKT: GLD), have lost about 15% since January. 

Reasons behind the recent gold crush

Gold prices dived this year due to many reasons. One is the Cyprus financial crisis: the country may sell its gold reserves. This creates fear for many people, who predict that the price of gold will fall due to increased supply. This unpredictable situation has contributed to decreasing the gold obsession.

Another important reason for the decrease in gold prices is China’s slow economic growth. China has one of the most successful economies of the world, and any change in its economy affects the overall economic condition of the world. The unexpectedly low growth rate of the Chinese economy has made economists uncertain about the future prices of precious commodities.

What about major gold companies?

If gold prices rise, gold companies will enjoy great benefits and vice versa. However, given the recent events, it is very difficult for gold companies to sustain their businesses. Leading gold merchants have faced serious losses during the last few months. Goldcorp (NYSE: GG), the largest gold company by market capitalization, has lost 20% this year. Even worse, Barrick Gold, the second largest gold company by market capitalization, (NYSE: ABX) has lost 44% since January. Both companies disappointed their shareholders by reporting revenue and profit figures below market estimates.

Both Goldcorp and Barrick Gold are trading near book value. Goldcorp supports a P/B ratio of 1.06, whereas Barrick Gold has a P/B ratio of 0.93. While Barrick looks relatively cheaper based on the P/B ratio, Goldcorp is a safer bet because it has almost zero debt. On the other hand, Barrick Gold has a debt ratio of 0.66. Therefore a fall in gold prices is likely to put Barrick in a worse position than Goldcorp.  

One thing to remember is that gold merchants are not the only ones who are going to suffer from low gold prices. The gold mining companies can face serious threats from decreased gold prices. Vectors Gold Miners (NYSEMKT: GDX)which invests in gold mining stocks, has lost more than 40% in the last six months. While the Vectors Gold Miners ETF looks like a relatively more diversified investment, Barrick Gold is the largest component of Vectors Gold Miners, followed by Goldcorp. Therefore, changes in gold prices are likely to have magnified effects on gold miner ETFs, like Vectors Gold Miners.

India and China

Demand for gold is expected to rise in India and China. Due to their rapid industrial development, economists speculate that domestic gold prices will increase due to higher demand. India in particular is the world’s largest consumer of gold because of its constant growth and social values. At the same time, other analysts believe that gold is a metal with very low industrial use. Thus, demand for gold shouldn't increase.

The Chinese demand for gold has been increasing since 2007. The average increase in gold demand is 27% percent, meaning a significant increase in the overall demand of gold globally.

Summary

Given the recent crash in the gold market, the overall vibe for the gold has turned negative. Many analysts predict that gold prices are going to fall in the next decade, which indicates an end to the gold obsession era. The increased volatility is also a serious concern for those looking for safety. Due to this fear, many risk-averse investors have either left the gold market or are looking for the right time to get off the wagon. 

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Nur Tarkak has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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