The first few months of 2013 have not been kind to gold equity investors and Wednesday was no exception.
The NYSE Arca Gold BUGS index (HUI) dipped 4.6%, marked by a 6.5% decline in NovaGold Resources Inc., a 5.6% pullback in Barrick Gold Corp. and a 3.4% loss for Newmont Mining Corp.
This brought the index’s year-to-date losses to more than 27%, as a sell-off that began in the fall of 2012 continues.
John Bridges, a mining analyst at JPMorgan, believes the gold sector is suffering from seasonal weakness, which is being exacerbated by the risk of further strength in the U.S. dollar.
“We continue to feel that while gold and the equities make long-term sense in this new financial world, we remain cautious during Q2 and until we see how much the dollar is strengthened by funds seeking a haven from a Cyprus style bail-in event,” Mr. Bridges told clients.
Gold miners begin reporting first quarter earnings with Barrick on April 24.
Mr. Bridges noted that while all the companies are trying to contain costs, they will likely take some time to stabilize. As a result, he thinks the upcoming reporting season could have been a catalyst behind some of Wednesday’s selling.
The analyst also noted that the second quarter is usually a lacklustre one for precious metals as demand from India, the world’s largest market for physical metal, slows.
However, he is hoping that the normal seasonal strength expected in Q3 is not capped this year by U.S. dollar strength.
“Transparency in U.S. government and State accounts telegraph the dollar’s financial problems but for many in Southern Europe or the Korean peninsula, U.S. financial markets may look quite attractive,” Mr. Bridges said. “And then there’s the growing U.S. energy independence to help the balance of payments. Consequently, the US$ currency risk is probably to the upside, and this could continue to cap the gold price.”
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