Is it Time to Sell Gold?

The gold market has cooled down in the past year and half. The belief that gold will always go up persists. Does it still worth investing in gold? Is it still a good investment? Let’s see if it’s time to change this common belief about this precious metal.

To that end, let’s check several different gold investments and see their performance during the past year, their outlook in the near future, and the alternatives investments available to gold related investments.

The spike in the price of gold in recent years seems to have ended. The U.S economy is slowly coming out of its slowdown, the U.S inflation remains stable around 2%, and even the launch of QE3 by the Fed at the end of 2012 didn’t help rally the price of gold. So the gold market isn’t progressing. How are gold related investments doing?

Gold and Gold ETF

The gold market didn’t perform well in the past several months. The price of gold fell by 3.6% (year-to-date). In comparison, the S&P500 index rose by 9%. The gold ETF SPDR Gold Shares (NYSEMKT: GLD) has also declined during the year by nearly 3.3%. The gold hoards that this ETF hold continues to plummet and since the beginning of the year, the ETF’s gold holdings fell by more than 9%. The decline in ETF’s gold holdings is another indication that inventors are pulling out of gold.  The bearish market sentiment in recent months including the progress of the U.S economy may have contributed to the rise in stock market and decline in demand for safe haven investments.

Gold Mining Companies

Gold mining companies such as Barrick Gold (NYSE: ABX) and Goldcorp (NYSE: GG) haven’t had a good year 2012 and 2013 might not be any better. The cost of mining gold continues to rise, it becomes harder to reach gold caches and the price of gold isn’t rising. Barrick’s stock fell by more than 16% since the beginning of the year; Goldcorp’s stock also fell by nearly 8.6%.  For both companies analysts project these companies’ earning per share will rise in 2013 compared to 2012 but will be lower than in 2011: Goldcorp’s EPS in 2012 was $1.95 and the average projected EPS in 2013 is $2.11. In 2011 the EPS was slightly higher at $2.18. Barrick’s EPS in 2012 was $-0.66, and in 2011 it was $4.48. The projected EPS for Barrick is $4.16 for 2013. At least these companies offer dividend unlike ETFs: Barrick’s annual dividend yield comes to 2.7%; Goldcorp’s annual dividend yield is at 1.8%. But the high mining costs and the uncertainty around the amount of gold these companies produce make these investments risky. Moreover, if the price of gold will continue to decline, these companies’ growth in revenues and profit margin will be adversely impacted.


Gold Royalty Companies

As oppose to gold mining companies and gold etfs gold royalty companies such as Royal Gold (NASDAQ: RGLD) continue to show growth in revenues and a high profit margin. In 2012, the company’s net revenues rose by more than 21%, and its operating profitability remained high at 49% – a decline from 55% in 2011.  The company continues to have a negative free cash flow that reached as of June 2012 ($109). But this is mostly due to the company’s high investment related activities. Most of the company’s growth is related to its expanding operations and less to do with the price of gold. Since the company isn’t mining gold only receiving royalties from mining companies the risk it incurs is small.

On the other hand, its dividend yield, much like other gold mining companies’ annual yield, isn’t high at around 1.14% even after the company augmented its dividend from $0.15 per share to $0.2 per quarter. Moreover, since the beginning of the year the company’s stock fell by more than 12%. This decline may have been stem by the decrease in the price of gold. So even gold royalty companies aren’t performing well in the stock market and offer low dividend yield.   

The Bottom Line

I think that not only gold but also gold related companies aren’t doing well and may continue on this path as long as gold price declines. Currently it seems that the rise in the stock market, the slow recovery of the U.S economy, and the low inflation in the U.S is keeping gold from resuming its rally. If this trend continues, the price of gold will likely to further fall. In such a case the above-mentioned investment are likely to become less attractive.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.