What Just Stopped the Gold Rally? These Gold Miners are Being Driven Down

Since sinking 36% in the year-to-date, as measured by the Gold Miners ETF (GDX), gold is hitting a bump again. On May 10, 2013, gold prices dropped 3% to around $1,425 per ounce. Investors should not ignore the bearish trend for gold shares (GLD) that began in October 2012, and the strength in the dollar index. In just two days, the dollar index is up 2%.

Stock Market Crisis over 5 Years Ago

The call to be bullish for gold made sense during the financial crisis, but as fears eventually reached a peak, it became clear that monetary authorities would be debasing their currency from gold. More recently, Japan launched yet another QE (quantitative easing) effort to stimulate its economy. The move to weaken the yen is working. Gold miners are falling along with the weakening yen:

 

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Gold miners like Barrick Gold (ABX), Newmont Mining (NEM), and Goldcorp (GG) have yet to recover from recent losses:

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Barrick pays a dividend that yields 3.83%, which might lend shares support in the longer term. In the near-term, bearish bets against the gold sector is evident. Put volume on the gold miners (GDX) rose, but trading volumes in the ETF is far below that reached at the height of the sell-off in the middle of April 2013.

It is possible for a short squeeze to develop for gold miners, but the short float is very low for Barrick, Newmont, and Goldcorp. If anything, smaller miners with a market capitalization of under $1 billion could be poised for more downside. Investors tend to worry about liquidity and operating expenditures when the underlying metal prices decline. Companies to watch include Allied Nevada (ANV) and NovaGold (NG).

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Allied Nevada shares have yet to bottom, as lower metal prices are hurting the value of the company. The company said that it reviewing its Hycroft Mill gold mine expansion plans. In its first quarter, the company earned $0.10 per share on revenue of $49.2 million. The company sold 14 million shares through a bought-deal purchase which will be used for the Hycroft Mine development.

The most important asset for NovaGold is its Donlin project. The project has measured and indicated resources of nearly 40 million ounces and a grade of 2.2 grams. NovaGold is funding $2.4 million for the quarter, with its share of funding to be $15 million in 2013.

Conclusion

Gold miners continue to look like they have value, but as monetary authorities decouple the value of currency from gold, gold metal prices could continue its freefall. Until sentiment reverses for gold, investors should not take a large position in this sector. If investors wish to buy gold miners, Newmont and Barrick are attractive with dividends yielding 4.23% and 3.83% respectively, while Goldcorp pays a dividend yielding 2.02%.

Written by Chris Lau

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