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It has been a volatile week for gold prices, most heavily influenced on Wednesday after United States Federal Reserve Chairman Ben Bernanke gave no hints that a third round of quantitative easing was expected in the immediate future.
By Dave Brown — Exclusive to Gold Investing News
With many traders exiting positions in the gold market, the spot market price was pushed down nearly $100 on speculation that central banks might all be finished with accommodative monetary policies.
Spot market gold prices fell more than five percent on what was seen as the largest single day drop since the world’s fourth-largest investment bank, Lehman Brothers, became insolvent in 2008.
On Thursday, spot market gold traded in the range of $1,718.80 per troy ounce, which represented a 3.8 percent total decline over the last week.
Potential impact on gold producers and junior exploration companies
Ultimately if gold prices trade in a lower range, gold miners may face some reduced market valuation due to investors wanting less exposure to the underlying resource. However, since gold equities have not realized a strong correlation in share price appreciation to the price of gold for a considerable time, the effect should be muted. Junior exploration companies should be even more insulated against downside risks than producers, as the market has not realized the potential of their projects.
For investors this may represent a relative convergence, with gold equity values trading more closely to physical gold prices.
A note of caution
The Federal Reserve Chairman appears before the House committee and its counterpart, the Senate Banking committee, twice a year for a formal review and comment regarding the management of monetary policy. During this testimony on Thursday, he emphasized that next January features the expiration of the Bush tax cuts, the payroll tax cut, extended unemployment benefits, and the implementation of large spending cuts to the federal budget.
If unemployment rates disappoint, and growth in the US economy lags behind current expectations, a return to a more stimulative policy could see the Federal Reserve change its outlook to more quantitative easing. This outcome would be interpreted as a bullish signal for the price of gold.
Market strategist’s outlook supports long-term gold price appreciation
Matthew Grossman, Chief Equity Market Strategist for Adam Mesh Trading Group, indicates his expectation for gold prices in light of the recent short-term volatility. With a protracted period of lower interest rates for the next two years, he sees this week’s gold price contraction as a buying opportunity. “I think this could be a positive for investors looking to get into precious metals for the years to come.”
Company news
Barrick Gold Corp.( TSX: ABX) expects to continue to “aggressively” increase dividends with a continued long-term optimistic outlook for gold prices. Over the last five years, Barrick has increased its dividend by about 170 percent, including a 25 percent boost last year. Last October Barrick raised its quarterly dividend payout to 15 cents a share from twelve cents a share.
Barrick’s activities are of interest for all gold producers because they indicate a strong level of confidence in the underlying value of gold and highlight the intentions of the world’s largest pure gold miner. Further, they set a market expectation; investors will note careful payout ratios and the ability of all gold producers to employ marginally increasing levels of free cash flow. The relatively large cash balances might be used for internal exploration and development programs, seeking accretive merger and acquisition targets from junior exploration companies, or paying increasing dividends.
Junior company news
Inter-Citic Minerals Inc. (TSXV:ICI) announced the renewal of three key exploration licences at its Dachang Gold Project. The Chinese Ministry of Land and Resources also granted Inter-Citic two year extensions on three other exploration licenses.
Northern Freegold Resources Ltd.(TSXV:NFR) announced that preliminary metallurgical testing of samples from its porphyry gold-copper project has started. The company expects the program to last for three to four months.
Rainy River Resources Ltd. (TSX:RR) reported an increase to measured and indicated, as well as inferred resources, at its Ontario-based Rainy River gold project.
Geologix Explorations Inc. (TSX:GIX,FWB:GF6) has obtained an option to earn a 100 percent interest in the La Carreta gold-copper-silver property located approximately 20 km northeast of its Tepal project in Mexico.
Hy Lake Gold Inc. (OTC Pink:HYLKF) has started its 2012 drill program at the company’s West Red Lake properties. The program will consist of 17 holes on its wholly-owned Mount Jamie mine and twelve holes on the adjacent Golden Tree Property.
Securities Disclosure: I, Dave Brown, hold no direct investment interest in any company mentioned in this article.