AngloGold Ashanti Limited (ADR) (AU), SPDR Gold Trust (ETF) (GLD): Is There a Silver Lining For Another Gold Rush?

AngloGold Ashanti Limited (ADR) (NYSE:AU), the South African-based gold producer, engages in the exploration, production, and marketing of gold and other minerals like sulphuric acid and uranium. The stock is down 59.29% year-to-date. Just like its rivals, AngloGold Ashanti Limited (ADR) (NYSE:AU) suffers from declining gold prices. Gold Bullion sales and marketing accounts for more than 90% of AngloGold’s revenues.

The company’s cost of producing one ounce of gold stands at about $1300, which is above the current gold price. As of December 2012, AngloGold Ashanti Limited (ADR) (NYSE:AU)’s cost of producing one ounce of gold stood at $1,078. This leaves little room for healthy margins, thereby putting the company under pressure on declining gold prices.

AngloGold Ashanti Limited (ADR) (NYSE:AU) reported a 14% decline in revenues from its most recent quarter. The company’s operating margin stands at about 20% with a net income of $488 million, cumulative for the last four quarters.

The silver lining?

According to recent reports, China, despite its current economic troubles, has expressed a decent appetite for gold bullion. Reports indicate that China’s demand for gold almost equals global production. This indicates that regardless of the fact that the U.S. Federal Reserve Board may initiate tapering in the near future, the demand for gold in Asia and other struggling economies could offer a silver lining for recovery.

Additionally, for most of the companies, a majority of their gold sales do not come from the U.S. For instance, 44% AngloGold Ashanti Limited (ADR) (NYSE:AU)’s gold sales come from South Africa with Europe and North America accounting for 17% each. Nonetheless, the challenge is that gold is valued in U.S. dollars, which in the recent past, has continued to strengthen against major currencies.

The bottom line

Gold has probably gone through some of its worst periods in recent times. It would be unimaginable for the commodity to slide further from its current lows. The commodity trades roughly about $100 above production costs, which means a further dive, could push it below economic viability.

However, the increasing demand from China coupled by recent rebound of the SPDR Gold Trust (ETF) (NYSEMKT:GLD) could mean that after all, there is a silver lining for another rally, but definitely nothing close to the highs of 2011.

Nicholas Kitonyi has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Nicholas is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Is There a Silver Lining For Another Gold Rush? originally appeared on Fool.com is written by Nicholas Kitonyi.

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