Stocks closely associated with gold and gold mining were hammered on July 15 as slipping gold demand and uncertainty concerning the US Federal Reserve’s plans sank the price of the yellow metal. Gold plunged 2.3 percent on the day, representing its biggest daily trading loss for the year.
Federal Reserve Chair Janet Yellen is expected to give two key testimonials on the week, starting with the Senate Banking Committee on July 16. She will then address the House Financial Services Committee the following day. Both events should shed light on the status of the Fed’s so-called “tapering” plans.
Yellen Getting Hawkish?
While any tweaks will certainly affect the price of gold, for the time being the expectation appears to be that the normally dovish Yellen will take a more hawkish approach to interest rates in light of stronger than expected jobs report and a generally more robust US economy. Deustch Bank’s Chief US economist Joseph LaVorgna arrived at this conclusion not just from the available economic data, but more so based on the fact that Yellen is speaking on behalf of the entire Federal Reserve and not just making recommendations. "There is a risk (Yellen) is less dovish than what the financial markets assume are her underlying views," LaVorgna said, belying the widely-held opinion that despite Yellen's supposed personal opinions on tapering, her relatively short tenure at the helm of the Fed makes her an unknown quantity.
The market appears worried that her recommendations will include the raising of interest rates, and thus a retreat from the historical safe haven of the precious metals market in favor of steadily appreciating assets like Treasury bonds.
Concomitant with apprehension concerning the Fed’s plans, markets have reacted negatively to the perception of weakening demand abroad, especially in India. Always a reliable consumer of gold, India’s continuation of a heavy import tax on gold had driven prices up, but has also apparently weakened demand. In a note to clients, Eugen Weinberg, commodity strategist at Commerzbank in Frankfurt claimed that softer physical demand for gold had long been present, but had been covered up in the market by speculative-fueled price increase.
After a disastrous 2013 that saw the end of a 12-year bull run for gold, the precious metal had shown signs of rebound in the first quarter of 2014, at one point touching $1,400 an ounce. Following a correction followed by another rebound in the second quarter of the year, the plunge on the day pushed gold back near $1,300, with prices settling at $1,308 an ounce by day’s end.
Gold Equities Lose Their Luster
In turn, equities associated with the gold mining trade plunged en masse. Newmont Mining Corporation (NEM) , an S&P 500 component and the largest gold miner (by market cap) in the US, slid 2.38 percent on the day. Allied Nevada (ANV) , which was the subject of a recent www.equities.com Bulls and Bears analysis, dropped 6.89 percent to hit $3.65 a share. Junior miners Exeter Resource (XRA) and Silvercrest Mines (SVLC) likewise saw heavy losses on the day, notching losses of 6.98 and 6.91 percent, respectively.
Gold mining exchange-traded funds were the biggest losers in the entire ETF market. Leveraged play Direxion Daily Gold Miners Bull 3X Shares (NUGT) shed 7.82 percent on the day to hit $46.59 a share. Its small-cap counterpart Direxion Daily Junior Gold Miners Bull 3X Shares (JNUG) got hit especially hard, losing 13.97 percent on the day to hit $28.89 a share amidst exceptionally high volume.