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Gold prices head south, taking materials sector for a downward ride

Gold prices declined sharply on Tuesday to below the $1,600 an ounce level on the back of a stronger U.S. dollar, and as positive economic data in the U.S. dulled the yellow metal's safe haven appeal, sending the materials sector on Toronto's main index south. 
Gold prices head south, taking materials sector for a downward ride

Gold prices declined sharply on Tuesday to below the $1,600 an ounce level on the back of a stronger U.S. dollar, and as positive economic data in the U.S. dulled the yellow metal's safe haven appeal, sending the materials sector on Toronto's main index south. 

The S&P/TSX Composite Index, which was hovering around the breakeven mark in early trading, was brought down heavily by materials - lately down a whopping 1.5% - and by metals and mining, lower by almost 0.9%. 

Gold for June delivery fell by $19.2 to $1,581.70 an ounce, as the U.S. dollar gained against the euro following record high unemployment numbers in the eurozone in February, and weak manufacturing data. A weaker dollar supports dollar-denominated commodities like gold and oil, while a stronger dollar works in the reverse. 

Meanwhile, in the U.S., economic data continued to point toward a recovery, with orders for goods produced in U.S. factories rising 3% in February as expected to mark the biggest gain in five months, the Commerce Department said Tuesday.

According to a research note by strategists at Societe Generale, titled "The end of the gold era", there are three factors that could put an end to the rally in gold prices seen over the past five years. These factors are better economic conditions that would spell the end to the Federal Reserve's ultra-easing policies, fiscal stabilization as well as a rise in the U.S. dollar. 

Societe Generale analysts declare themselves considerably more bearish than consensus, and according to the note, say gold prices could average $1,500 an ounce over the course of this year, dropping to $1,375 an ounce by the end of 2013. 

"This 15% fall is quite dramatic especially compared to the Bloomberg consensus forecast of $1752/oz by the end of 2013," SocGen's Patrick Legland wrote in the note. 

The biggest decliners in materials in Toronto were led by Silvercorp Metals (TSE:SVM), down more than 7%, and Premier Gold Mines (TSE:PG), off more than 6.4%. 

Gold giants Barrick Gold (TSE:ABX), Kinross Gold (TSE:K) and Goldcorp (TSE:G) retreated 1.4%, 2.3%, and 1.9%, respectively. 

Brokers are warning that year-over-year declines in prices of metals during the first quarter, combined with cost pressures, are likely to result in lower earnings in the next few weeks from precious metal miners, which could lead to more investors exiting the gold mining space. 

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Article
April 16 2013

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