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A golden crash

Panic selling hit commodities prices overnight, with gold plummeting 9.4% to trade at US$1344 an ounce, its biggest percentage fall in 30 years, and its lowest price in two years.

Gold’s drop triggered a wave of selling in commodities with the price for silver sliding 11%, and platinum and palladium falling sharply. A softening economic outlook for China, with GDP growth for the first quarter of the year falling below analyst forecasts, was the main cause for concern, but not the only one.

Cash-strapped Cyprus is reported to be selling off some of its gold reserves to finance its bailout, and fears other European countries may be forced to follow suit, also put downward pressure on commodities. Recent signs that the US is nearing a decision to start winding down its monetary stimulus contributed to the slump in gold. Add in forced selling as some investors are required to sell to meet margin calls, and expectations that China and India, the world’s two largest buyers, may slow their purchases of gold, and the selling pressure becomes clear.

Gold miners on the ASX were hammered, with many recording double digit falls. Alacer Gold (ASX: AQG) lost 17%, Medusa Mining (ASX: MML) fell 16%, while Kingsgate Consolidated (ASX: KCN) and Resolute Mining (ASX: RSG) both lost 15%.

The question on many investors’ lips now is where will it end? It certainly appears that gold’s ‘golden’ run over the past 12 years has come to an end. Often considered as a hedge against inflation or to preserve purchasing power, gold appears to have lost its ability to do either, with investors fleeing the metal in search of other assets.

For investors in gold mining stocks, the falling price is becoming an issue, and we’ve already seen two junior miners Kentor Gold (ASX: KGL) and Navigator Resources (ASX: NAV) slide into administration. According to Bell potter research, a survey of 15 mid-tier Australian gold producers showed total production costs at around $1,170 an ounce. At the current gold price, they don’t have much of a margin, and we could easily see the price of gold fall below $1,000 an ounce.

Foolish takeaway

For gold bugs and investors in gold mining stocks, there’s nowhere to hide. No one can predict where the gold price will be in six months, let alone in the medium to long-term, and investors face the choice of bailing out now or hoping for a recovery – which appears slim.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King owns shares in Kingsgate.

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