Weak Economic News Sends Investors to Gold (ABX, KGC, GFI, GDX, GLD, RGLD)

This morning’s reports on unemployment (up), manufacturing (down), housing (sort of up), and consumer spending (up a little) have pushed the market down. Out of the gate this morning, gold miners and spot gold prices followed the market down, but as trading has increased the spot gold price has recovered about half its early losses and the gold miners are coming back too.

Barrick Gold Corp. (ABX) fell more than a dollar in the first hour, but has since regained about a third of that. Kinross Gold Corporation (KGC), Gold Fields Ltd. (GFI), and the Market Vectors Gold Miners ETF (GDX) have followed roughly the same pattern. Spot gold opened above $1,009/oz this morning, fell to about $1,002/oz, and has since recovered to about $1,004.50/oz. Royal Gold, Inc. (RGLD), which owns royalty shares in metals miners, has followed the miners’ trend. The SPDR Gold Shares ETF (GLD) has followed the spot price.

All that commotion is pretty much what one would expect as markets swirl around. But gold itself, and the mining of gold, face a couple of fundamental issues. First, demand for gold jewelry fell 22% from the first quarter of 2009 to the second quarter. Even recycled gold sales have softened, from 566 metric tons in the first quarter to 334 metric tons in the second.

Second, sales to the ETFs have also dropped. In the second quarter of 2009, demand from ETFs fell to 56.7 metric tons, from 465.1 metric tons in the first quarter of the year. That is not a typo. And expectations for third quarter ETF purchases remain weak.

As for mining, Gold Fields Ltd. confirmed today that it expects production and costs for its first fiscal quarter of 2010 to be in line with previous guidance. Gold Fields expects its notional cash expenditure (all-in costs) to be $835/oz. If gold prices remain around $1,000/oz, the company and other gold miners will do nicely, thank you. But reining in production costs has been difficult for all mining companies, and the third quarter may be no different.

Paul Ausick