Gold price drop triggers mining stocks bloodbath

Gold struggled on Wednesday losing more than 1% to exchange hands for $1,327 in late afternoon trade in New York. Gold is coming off two-year highs hit early this month and year to date the metal is still up more than 25% or nearly $270 an ounce.

Some of the biggest drivers of 2016 gold price surge have begun to lose steam in recent weeks. Large scale gold futures and options speculators or "managed money" investors such as hedge funds have been scaling back bullish bets recently and the frenzied buying of physically-backed gold ETFs have also moderated (see graph).

Investment flows have started to flash warning signals which could indicate that gold, just like in May, could be facing another correction

Hansen, chief commodity strategist at Saxo Bank, says while the fundamental drivers still support a higher gold price, investment flows have started to flash warning signals which "could indicate that gold, just like in May, could be facing another correction."

Worries about the outlook for the  price was evident among gold mining stocks on Wednesday with heavy selling across the board which only accelerated towards the close.

Barrick Gold Corp (NYSE:ABX, TSE:ABX) fell 9.6% with more than 30 million shares changing hands pushing the shares to its lowest level since the beginning of June. At a market value of $20.8 billion in New York, the Toronto-based company has now lost its status as the most valuable gold mining company in the world.

World number two in terms of production Newmont Mining Corp (NYSE:NEM) shed 7.7% in afternoon trade. Denver-based Newmont, the only gold company that forms part of the S&P500 index, like Barrick has more than doubled in value in 2016 and is set to end the day as the gold mining company with the top market capitalization in New York at $21.1 billion.

While Barrick has been disposing of mines and putting others on the block, including its Kalgoorlie Super Pit joint venture with Newmont in Australia, the US company is building its portfolio and last year acquired the Cripple Creek & Victor gold mine in Colorado. Newmont also has five key projects that are in execution stage including the Turf Vent project in Nevada and Merian mine in South America. The company's expansion drive would lift annual production above 5 million ounces and could see it overtake Barrick in terms of output as early as next year.

Gold price drop sinks mining stocks

Goldcorp (TSE:G, NYSE:GG) was also a big loser on the day falling 9.3%  for market capitalization of $13.5 billion in New York.  Compounding the problems for the Vancouver-based company on Wednesday were claims contamination of groundwater at its flagship mine in Mexico may be more serious than previously thought. The company says it has taken all the necessary measures to contain the leak.

Other Canadian gold miners also succumbed to the negativity as investors lock in profits given the rally in the sector year to date. Toronto's Kinross Gold (TSE:K, NYSE:KGC) fell 10.3% dropping its market value to below $7 billion. Agnico Eagle Mines (TSE:AEM, NYSE:AEM) market capitalization fell 7% to $11.6 billion in New York. Yamana Gold (TSE:YRI, NYSE:AUY) was another big loser on the day, dropping 10.2% for a market value of $5.3 billion in New York while Eldorado Gold Corp (TSE:ELD, NYSE:EGO) declined 7.1% and it's now valued at $2.5 billion in New York.

The  drop in the American Depository Receipts of AngloGold Ashanti (NYSE:AU), the world's third largest gold producer in terms of output, were more modest at 3.4% for a market value of $7.1 billion on the NYSE, but the counter is showing double digit declines for the week. Other Africa-focused miners also didn't fare well either: ADRs of Gold Fields (NYSE:GFI) lost 5.7%, its South African peer Sibanye Gold (NYSE:SBGL) fell 5.3% and Randgold Resources, dipped 5.4% and is now worth $9.3 billion.