Why Barrick won’t make a comeback in 2012?

It seems that Barrick Gold Corporation (NYSE: ABX) just can’t catch a break. The company lost in a couple of trails in South America; one trail referred to the company’s attempt to block Goldcorp Inc.’s 2010 from purchasing a majority stake in a gold project in Chile; the other in Argentina where Barrick suffered a reversal in the Argentinean high-courts; this decision might affect development of the company’s Pascua Lama project. Perhaps the recent hire of a new CFO will help the company to recover but there are already those who think this move won’t do much.  Besides the recent developments in Barrick, one of the main factors that will continue to affect the company’s stock is gold price and by extension SPDR Gold Shares (NYSEMKT:GLD). If gold price won’t rise, the company’s stock price isn’t going anywhere. Let’s examine the relation between gold and Barrick and see what does it mean for Barrick investors.

Barrick is the world’s leading gold producers’ the relation between the company’s stock price and gold is straight foreword. During the year (2012) the linear correlation was 0.66 (the daily percent changes); this means that under certain assumptions (including linearity of relation and normality of price changes) the changes in gold price could explain nearly 43% of the variance of Barrick’s stock. This is a very high rate. Further, during June/July the correlation reached 0.822. This very high and positive relation means that as gold price declines, the stock of Barrick tends to follow and also decrease.

The chart below shows the price development of gold and Barrick during the year. It shows how the relation between the two is very strong and robust.

Barrick Gold Corporation and Gold Price  2012

This means that if gold price will not rise, then Barrick isn’t going anywhere. So where is gold headed?

During 2012 gold didn’t perform well and declined by 7.1% (UTD). Furthermore, the SPDR Gold Shares also fell by a similar rate.

The recent FOMC meeting from June 2012, in which it was decided to extend operation twist, put the kybosh (at least for the near future) on another stimulus plan in the form of quantitative easing. As I have presented in the past, one of the main factors that drove the price of gold up in recent years was QE1 and QE2. This means without another QE program I suspect the price of gold will remain at its current range.

Perhaps the upcoming FOMC meeting to be held at the end of July- early August might offer some news that will stir up the bullion markets. I still think despite the ongoing slowdown in the U.S economy the circumstances don’t warrant another QE program. This means no QE3, no rally for gold. If gold price will remain at its current range, this could mean Barrick won’t rise.

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