Look out below: First gold stocks, now gold

November 2, 2012

Talk about a bad week for gold.

Just a day after Barrick Gold Corp. shocked equity investors with its dismal quarterly earnings and news of rising costs for its Pascua-Lama project in South America, gold itself shocked commodity investors on Friday.

Gold fell more than $35 (U.S.) an ounce, to $1,679, a decline of more than 2 per cent. That marks its worst one-day tumble in more than four months and brings its overall decline from its recent high a month ago to 6.2 per cent.

Blame the setback on the greenback. The U.S. dollar index rose to 80.6 on Friday – a two month high – with its biggest one-day move since July.

And that was largely due to a strong U.S. payrolls report: The Labor Department reported that employers added 171,000 jobs in October, well above the 125,000 jobs economists had been expecting. And while the unemployment rate ticked higher, to 7.9 per cent from 7.8 per cent, the move was due to more workers seeking employment rather than giving up looking.

What's more, gold has often been seen as a refuge from central bank hanky-panky – notably, the money-printing, bond-buying stimulus efforts of the Federal Reserve. But given that the Fed has said it will provide stimulus until the U.S. labour market improves "substantially," a strong employment report turns investor attention toward the day when stimulus is removed.

Of course, this recent blip of volatility in the price of gold doesn't look too worrying next to the longer-term bull market. Over the past two years alone, the price of gold has risen nearly 24 per cent. That tops the 19 per cent return for the S&P 500 – but after factoring in dividends (something gold doesn't offer), U.S. stocks have a slight edge.

At least this week's decline in gold stocks and gold bullion provides clarity to one conundrum. For some time, gold producers have seen their stock prices lag gold itself by a substantial margin. This week, they moved in tandem.

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