TORONTO (miningweekly.com) – Gold bugs have had good reason to be gloomy of late as speculation was rife that the yellow metal’s price would in future descend to $1 000/oz, after recently having declined to a five-year low of $1 080.20/oz on the London PM fix.

Following this drop on July 24, the gold price clawed back some of the loss last week and stood at $1 090.65/oz on Tuesday afternoon.

However, some were arguing that gold would breach the $1 000/oz mark and fall to further depths. Few commentators predicted a revival in the yellow metal’s fortunes any time soon – even if gold bears covered overly strong short positions.

“I don’t see a lot of specific reasons for gold to gain in the next little while,” Resource Maven head Gwen Preston told Mining Weekly Online. “Covering shorts can provide support for gold, but that’s a transient, short-term thing. It’s not something that will hold.”

The psychological effect of $1 000/oz was noteworthy, albeit mainly for those focused on the yellow metal, she explained. The way this number might be reached would be more important: whether it was a slow slide or a short, sharp shock.

Of course, the drivers behind the pressure on gold had been varied and diverse. But, it appeared the traditional narrative had been in play: that gold’s performance weakened as the US dollar strengthened. This was coupled with investors avoiding commodities or mining stocks in general, favouring other equities as wider markets climbed and delivered more robust returns.

But some had also predicted a US correction could be likely, possibly spurring participants back to metals, minerals or mining.

“I don’t believe that the US economy is doing particularly well. I feel some kind of correction is coming but not necessarily a crash,” Preston said. “[Consider the] strong dollar; US companies are realising that it’s hurting them.”

Dovetailed with the US economy and dollar had been the debate about an interest rate rise and the ramifications this could have, with many suggesting that a September increase was most likely. The implications would not necessarily revolve around the number itself, but around the rising trend it could herald, Preston explained.

STRONG, BROKEN OR MENDED?
Added to the mix had been events in China, specifically June’s flash crash in equities and the aftershocks felt since, such as  the absence of Chinese buyers in the gold space.

Previously, they might have been tempted to re-enter the market and buy on the downside, which would eventually become an important support for spot gold. Today, however, they were more concerned about the damage inflicted on their wider portfolios.

For many investors, the past few months were an unusual and unpleasant experience as they had previously only played markets that trended higher.

“But everybody and their dog knew [the market] would have to correct. You can’t keep on gaining indefinitely and not have a correction,” Preston advised, noting that China was going through a sharp learning curve for what it was like to have a reasonably free market.

Beyond gold, other metals continued to be affected by China’s sombre outlook; for example, copper experienced some offloading as market participants covered margins, a situation that added more weight to a price already under pressure.

Worries had also persisted about slowing growth rates in China and what this might mean, particularly for base metals, iron-ore, coking coal and a raft of other commodities. “We like to focus on China’s [gross domestic product] growth and, when we see a number like 7%, we worry it might really only be 6%,” Preston commented.

However, the growth was robust when one remembered it was compound in effect; China had grown off a larger and larger base each year. In addition, the government’s intention was always to mature the economy away from feeding the growth spurt towards a greater focus on consumerism.

EYES ON THE PRIZE
Gold remained exciting for the long-term, particularly for investors wishing to carefully position themselves for its next upswing, Preston said. Zinc’s fundamentals were also of interest as global output declined on mine closures and a lack of replacement material was coming on stream.

Uranium’s prospects were positive too, with Preston noting analysts’ favourability towards it. “Most major investment bank analysts are predicting a doubling of the uranium price over the next two years. That shows you just how deeply mining analysts and investors believe uranium will go up,” she highlighted.

Other resources that caught her eye included lithium and direct-application phosphate rock. But she stressed that great care and attention was needed when selecting investments given the current market conditions.

In considering the seniors, most had continued atoning for the sins of their recent past, when the mantra of expansion dominated their business models. This was often to the detriment of efficiencies and productivity, which were now the primary focus, Preston noted.

In the meantime, the pattern of consolidation within Canada’s junior and midtier mining and exploration sectors continued, albeit still at a slow pace as those companies with money looked for the best merger or acquisition bargains. Experienced management teams were most likely to achieve the greatest successes in this field, Preston stated.

“There are a number of good examples whereby strong management teams have established the vehicles they intend to drive through into the next rally,” she added. “Oban is one example, while Newmarket Gold and First Mining Finance are others.”

When tracking companies, Preston considered their expected near-, medium- or long-term returns. Early-stage exploration companies were currently long-term bets of limited interest because they generally responded last to any market upswing.

For nearer-term opportunities, she considered equities in the mining space with the potential to respond quickest to an upturn. Generally, that meant producers with firm control over costs and those who had steady, possibly growing production profiles.

“These companies have been proactive with acquisitions or building new assets, which means they are well-managed and that they haven’t just managed their costs by shutting everything down,” she explained.