Investors banking on a quick recovery in gold mining shares have only seen more pain in the third quarter of the calendar year. The price of gold has retreated back below US$1,300 per ounce in the last week, sending shares in gold producers falling again.
Shares in Newcrest Mining (ASX: NCM) fell over 3% yesterday and are skirting eight-year lows at $9.24, while Silver Lake Resources (ASX: SLR) also fell 3%, which contributes to a fall of 80% over the last 12 months. Regis Resources (ASX: RRL), by comparison, is doing well, with shares down just 40%, but is still severely lagging the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO).
While the price of gold is the key contributor to the poor fortunes of gold mining companies, there are several reasons driving this downward pressure at the moment. Here are three.
1. Plummeting investment demand
Figures prepared by the World Gold Council show demand for gold as an investment plummeted in the third quarter of 2013 compared to 2012. Demand dropped from 425.3 tonnes in Q3 2012 to 185.5 tonnes, a decline of 56%. This was largely attributed to 'outflows from ETF (exchange traded fund) positions' as investors speculate on early tapering of US quantitative easing and signs of improving economies.
Gold for investment is one of the big drivers of demand and its fall makes sense – no one wants to invest in gold when it's not going up and there is still a widely held belief that the price will remain stagnant, or even fall further over the short term.
2. Indian importation limits
India is one of the world's biggest gold-consuming countries, but demand continues to be restricted by government measures aimed at reducing gold imports in an attempt to stabilise the county's currency, the rupee. The factor contributed to the first Q2 to Q3 decline in gold demand since 2007.
The Indian government has placed a total ban on the import of gold coins, restricted gold bullion imports and implemented higher excise duties and import payment restrictions to stem the flight to gold.
3. Smaller investors just don't trust them
Many smaller investors got burned badly by the rapid fall in share prices earlier this year and the problem was compounded by the poor approach to write-downs and investor announcements by some companies.
The sour taste has lingered with investors since then and with few positive signs emerging from the industry, a lack of confidence has meant investors are keeping gold producers at arm's length.
Foolish takeaway
Although gold producers are pushing hard to lower costs and create operating efficiencies there have so far been few glimmers of hope to entice investors back into an industry that burned many and is still facing strong headwinds.
