Gold Tumbles Down – Has the Rally Ended?

NEW YORK (TheStreet) -- The price of gold has changed direction, and after adding more than $90 to its value since the end of May, gold kicked off the week with more than a $30 fall.

This decline also dragged down the leading gold exchange-traded fund -- SPDR Gold Trust (GLD) -- which is trading at $126.10, a 2.1% drop since the beginning of the week. Other gold investments have fallen, too. For instance, shares of Goldcorp (GG), a Canadian gold-mining company, have declined by 1.3% to $28.04 Will gold's recent fall continue?

Lower margins at the CME

One of the reasons for last week's recovery of gold is the recent decision of the CME Group (CME) to slash the gold margins by 10%.

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This reduction benefits gold investors as they require less cash to open a position on gold contract in the CME.

The news had a short-term positive impact on the prices of gold at the end of last week. But since then, the price of gold changed direction and corrected for this one-time occurrence. The main question remains, has the demand for gold picked up?

Demand for safe-haven investments

Many investors consider gold, much like U.S long-term Treasury bills, as a safe-haven investment. These two types of assets have tended to move in a similar direction.

But during the past several weeks, the yields on long-term Treasuries have moved in an unclear trend, while gold slowly recovered. The chart below shows the progress of gold and 10-year Treasury yield during June and July.

The unclear trend of long-term Treasury yields suggests the demand for safe-haven investments hasn't increased. That could imply gold's recent recovery was less related to a shift in market sentiment toward risk aversion.

Moreover, the stock market continues to recover, which tends to reduce the demand for investments such as gold and long-term Treasuries. The Federal Reserve's policy could be the impetus to drive gold prices higher.

The speculation around the Fed's policy keeps the long-term Treasury yields moving in an unclear direction, but could also play in favor of gold. That also means gold's latest recovery may not last long, as it's mostly based on speculation regarding the Fed's future plans.

Takeaway

The price of gold started off the week on a negative note, but could resume its rally in the coming weeks if the Fed keeps its monetary policy unclear and even makes some additional dovish statements.

For further reading: Gold and Silver Forecast for July.

At the time of publication, the author held no positions in the stock or fund mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates GOLDCORP INC as a Sell with a ratings score of D+. TheStreet Ratings Team has this to say about their recommendation:

"We rate GOLDCORP INC (GG) a SELL. This is driven by several weaknesses, which we believe should have a greater impact than any strengths, and could make it more difficult for investors to achieve positive results compared to most of the stocks we cover. The company's weaknesses can be seen in multiple areas, such as its feeble growth in its earnings per share, deteriorating net income, disappointing return on equity and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • GOLDCORP INC has experienced a steep decline in earnings per share in the most recent quarter in comparison to its performance from the same quarter a year ago. The company has reported a trend of declining earnings per share over the past two years. During the past fiscal year, GOLDCORP INC swung to a loss, reporting -$3.30 versus $1.78 in the prior year.
  • The company, on the basis of change in net income from the same quarter one year ago, has significantly underperformed when compared to that of the S&P 500 and the Metals & Mining industry. The net income has significantly decreased by 68.3% when compared to the same quarter one year ago, falling from $309.00 million to $98.00 million.
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Metals & Mining industry and the overall market, GOLDCORP INC's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has declined marginally to $273.00 million or 7.14% when compared to the same quarter last year. Despite a decrease in cash flow GOLDCORP INC is still fairing well by exceeding its industry average cash flow growth rate of -33.52%.
  • GG, with its decline in revenue, underperformed when compared the industry average of 4.5%. Since the same quarter one year prior, revenues slightly dropped by 6.8%. Weakness in the company's revenue seems to have hurt the bottom line, decreasing earnings per share.

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