Gold bubble burst wipes out $180 billion

Newcrest writedowns just the beginning of gold industry’s fall from grace.

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Many gold bugs have made it their business over the last two years to publicly pledge allegiance to the shiny metal as the price shot up. There was no shortage of commentators, analysts and even doomsday preppers preaching that the rapid rise in price was somehow justified by gold’s “intrinsic” value and long overdue.

However there can be no argument that the party is over for gold investors as the price continues to fall. According to data from 14 major mining companies compiled by Bloomberg, including Australia’s largest gold producer Newcrest Mining (ASX: NCM), $180 billion (US$165 billion) has now been wiped from the companies’ market valuations since the gold price peak in September 2011.

There have been more than $18.5 billion in writedowns in the last 16 months, including Newcrest’s $6 billion in writedowns announced at the start of June. Since then shares in Newcrest have tanked 37%, far outpacing the 23% decline in gold this year.

The daily declines will be weighing on investors exposed to gold companies, and smaller miners are the worst to be hit. Silver Lake Resources (ASX: SLR) has lost 80% of its share value in six months after being as high as $3.44 per share earlier this year. Regis Resources (ASX: RRL) has shed 40% and the ironically named Resolute Mining Limited (ASX: RSG) is down 60%.

One of the biggest issues currently plaguing the mining companies is the decreasing value of gold reserves in mines purchased over the last few years. Companies who paid premium prices are now having to write off huge amounts from their balance sheets as the value of the estimated reserves drops.



Foolish takeaway

Gold mining companies will no doubt start looking very cheap in the coming weeks and months as the selling continues and it is likely that many will be oversold in the current panic. However with no clues as to what the gold price will be doing tomorrow, next year or even 10 years from now, they are as much of a gamble as ever.

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Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article. 

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