Barrick Gold Corporation (USA) (ABX), Goldcorp Inc. (USA) (GG) & Gold: Poor Performance Was Expected

A month ago, in an article published in this blog, I warned about gold being expensive. Despite this, I never thought that the fall would be so violent. I never imagined gold would fall 15% in three sessions to a two-year low of $1,321 in the Asian market on Tuesday. That said, now two questions must be answered:

(1) Why was the fall so sharp? and (2) If you still hold gold in your portfolio through the gold ETF, SPDR Gold Trust (ETF) (NYSEARCA:GLD), what should you do?

According to Goldman Sachs analysts, “The sharp sell-off in gold was triggered by growing fears that the central bank of Cyprus would sell its gold reserves, potentially reflecting a larger monetization of gold reserves across other European central banks.” I believe this theory has some degree of reality but, beyond this short term fact, the truth is that gold was expensive. The world has come back to (slow) growth and gold owes most of its value to its safe-heaven characteristic. Besides, at some point, quantitative easing is going to expire and assets that yield zero cash will not be as valuable as they are now. So I think that Cyprus’ story is a good way to explain the yellow metal’s

There are many ways for you to hold gold in your portfolio. Perhaps the most popular one is being long GLD, but you might be holding gold through producers such as Barrick Gold Corporation (USA) (NYSE:ABX) or Goldcorp Inc. (USA) (NYSE:GG).

If I was still holding GLD I would sell. The reasons can be found in my previous post on the matter. Even if we do have a short term bounce as short positions are closed, I am sure the metal is poised to underperform the S&P 500 going forward. Of course I am not saying that the long term commodities bull story is over. But, first of all, you can have bearish periods within bullish trends and those bearish periods can last months, or even years. Secondly, gold is an odd commodity. As I mentioned before, it owes most of its value to its safe-heaven status. When safe-heavens are no longer required they tend to fall. And they fall even faster when they don’t have maturity dates nor cash yields to offer.

Gold producers are a different story. You should not only take into account the price of the commodity they sell but also their current valuation in a scenario where gold prices might be lower. I mentioned Barrick Gold Corporation (USA) (NYSE:ABX) and Goldcorp Inc. (USA) (NYSE:GG) because they are both good companies representing the commodity but, while one of them is a sell, the other is not.

Even if both Goldcorp and Barrick trade around their 52-week lows, Goldcorp is not undervalued versus its peers. Hence, if gold falls, Goldcorp should behave the same way. Meanwhile, Barrick, given its lower valuation, is more protected against a further fall of the commodity. To give you a valuation idea, Goldcorp trades at 1.25x price to NAV, while Barrick trades at 1.15x. Goldcorp Inc. (USA) (NYSE:GG) also trades at 2013 14.7x operating cash flow while Barrick Gold Corporation (USA) (NYSE:ABX) trades at the seemingly lower multiple of 10x. If you hold Barrick you might want to keep it in the portfolio while you sell other more expensive companies such as Goldcorp or even GLD.

Gold has lowered its price by 25% during the last six months, but this fall could be even harder. Gold is not oil or soy or even sugar. There are no clear fundamentals sustaining gold prices at current levels but its safe heaven status. My recommendation is clear: sell the metal unless you hold it through a deeply undervalued company such as Barrick Gold Corporation (USA) (NYSE:ABX).

The article Gold: Poor Performance Was Expected originally appeared on Fool.com and is written by Federico Zaldua.

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