The price of gold may have climbed back against the lows reached in 2013, but over half way through 2014 the industry is still doing it tough with many companies still in trouble. Here are three things that every gold investor must know today.
- The price of gold has not been rising
Although the price for gold has bounced back just over 8% since the start of 2014, it has been falling since March when it hit a high of US$1,382 per ounce and currently sits around US$1,300 per ounce.
This is despite significant global events and tensions which historically drive up the price of gold.
Keeping the price down is the continuing rise of stockmarkets, many of which (including the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO)), are hitting new highs as investors ride the bull market and companies like Google and Facebook in the U.S. beat earnings expectations.
- The writedowns just keep coming
In 2013 gold miners incurred asset writedowns totalling at least US$26 billion according to Bloomberg and if Newcrest Mining Limited (ASX: NCM) is anything to go by the writedowns could continue into 2014.
Newcrest has announced expected impairments of between $1.5 billion and $2.5 billion for the full year FY14, on top of the $6.2 billion hit investors took for the full year in 2013.
The company doesn’t currently intend to raise equity as a result, but many gold miners including Silver Lake Resources Limited (ASX: SLR) and Kingsgate Consolidated Limited (ASX: KCN) have requested additional funds from shareholders in the past year to aid working capital or pay down debt.
- Bigger problems could be just around the corner
When trouble struck last year gold miners sprang into action, stripping back operational costs and targeting higher-grade ore. This was an incredibly effective way to improve operating margins in the short term, but some analysts have questioned how long this can last.
Companies targeting higher-grade ore sources and slashing costs are, sooner or later, going to need to spend money to extract lower grade ore and replace or upgrade equipment, at which point companies may again find themselves in cashflow trouble.
Motley Fool contributor Regan Pearson does not own shares in any of the companies mentioned in this article.