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Gold stocks hammered

With the market seemingly disappointed with comments overnight from the Federal Reserve that the so-called “taper” could begin within months as well as data out of China showing a slowing of growth following a drop in export orders, investors in gold and gold stocks would surely have been hoping for a bounce.

It appears however that there is another force at play. According to a report in the Australian Financial Review gold production is set to hit a record high this year, despite the gold price having retreated back to just $1248. The near 25% plunge in the gold price this year was expected to lead to many high cost producers exciting the market which in turn would have reduced production and helped to raise the gold price again. However it doesn’t appear that the theory has played out in practice, rather many mines have increased their production to keep revenues and profits up.

Gold stocks were punished today with the major losers within the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) being dominated by gold miners. St Barbara (ASX: SBM) fell 10.8%, Perseus Mining (ASX: PRU) fell 9%, Silver Lake Resources (ASX: SLR) fell 8% and Medusa Mining (ASX: MML) fell 6.4%. All four stocks are back trading close to their 52-week lows having each lost between 70% and 90% of their value. That is despite having rallied strongly over the intervening period from late June to late August which saw their share prices surge off of the June lows by over 50%.

Foolish takeaway

With the AFR reporting that the World Gold Council believes gold consumption could fall between 5% and 10% this year and expectations that it could be 2015 before the gold market starts to see a contraction in production, despite the seeming appeal investors might think the beaten up gold sector could hold, it may be advisable for investors to steer clear of the sector.

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

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