The Dow's Gain Is Gold's Loss

The Dow's Gain Is Gold's Loss

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

After a correction of more than 5% in light of fears about the government shutdown's longer-term impact on the economy and the potential for a U.S. debt default, the stock market today cheered even the possibility of a favorable resolution to the long-running Washington stalemate. The Dow Jones Industrials posted their best session of 2013, as lawmakers presented the framework for what could become a way forward in negotiating on the federal budget. At the close, the Dow finished up 323 points, its biggest gain since Dec. 2011, with broader markets posting similar gains of around 2%. All of the Dow's 30 component stocks closed higher, and throughout the market, the vast majority of stocks finished higher.

One gloomy spot in the market, though, came from the gold sector, with spot gold bullion prices falling almost $20 per ounce, to drop below the $1,300 level, trading at about $1,288 as of 4 p.m. EDT. That sent most major gold-mining companies down, as well, with Newmont Gold falling 0.8%, and Goldcorp down 1.7%.

Gold investors almost find themselves in a no-win situation right now. On one hand, a resolution to the budget impasse would remove a lot of the uncertainty that the financial markets have suffered from recently, leading those who turned to gold as a safe-haven play to exit their positions and send prices lower. Yet, on the other hand, a continuing government shutdown could have dire economic impacts that would curb commodity demand, which, in turn, could also lead to reduced demand for gold, and lower prices.

For Newmont and Goldcorp, the temptation ever since the big plunge in gold prices earlier this year has been to protect against further declines with hedges, selling future production rights at locked-in prices. Back in July, Newmont CEO Gary Goldberg said that the company had discussed gold hedging, but that it hadn't chosen to follow through on it at the time. Goldcorp has been on record for years with its policy not to hedge future gold sales, although it does hedge exposure to base metals like lead, zinc, and copper to ensure stability in byproduct revenue that offsets production costs.

Unfortunately, gold investors could continue to see pressure well into the future. Even if the economy rebounds, rising interest rates will increase the opportunity cost for investors to hold gold. That, in turn, could leave Goldcorp and Newmont struggling in sympathy until the next challenge to the financial system rises up to send fear into the Dow and the broader financial markets, once more.

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