Gold stocks watchlist as bullion roars to dollar record

But listed gold equities remain well below levels seen in early 2008, and conservative analysts see a weak dollar as gold's booster, for now.

Author: Barry Sergeant
Posted: Wednesday , 07 Oct 2009

JOHANNESBURG -

Dollar gold prices roared to record levels, above US $1,040 an ounce, on Tuesday, as the dollar sustained renewed pressure after Australia unexpectedly raised interest rates. With early signals that other developed economies may raise interest rates from multi decade, and even record, lows, investors are betting that inflation rates will rise, underpinning an ongoing switch of funds to hard assets such as gold bullion.

Gold's rise on Tuesday was echoed across the broader commodities complex, and reflected in strong demand for resources stocks in general. In the background, the majority of stock markets around the world are trading at, or close to, 12-month highs, as reflected in the broad-based MSCI world equities US$ index, and the MSCI emerging markets US$ index, reflecting the general increase in investor appetite for risk.

Stock markets, however, have some way to go before recovering to levels seen when the MSCI world equities US$ index peaked at nearly 1,700 points early in 2007; that index is currently trading around 1,100 points. The general market meltdown first emerged strongly around October 2007, when the US's so-called subprime credit crisis started taking casualties, and intensified with the fall of Bear Stearns on Wall Street in March 2008, when gold bullion hit its previous record. Another intense markets sell off was triggered by the fall of Lehman Bros., also on Wall Street, in September 2008. Stock markets started to recover during the first week of March this year.

Record gold prices should also assist in the continuing recovery of losses in gold equities sustained by longer term investors. Barrick, the world's biggest gold digger by production and market value, traded above US$53.00 a share in early 2008, before crashing to US$17.27 a share in the weeks following the Lehman collapse. Barrick was trading up close to US$40.00 a share on Tuesday.

Relatively speaking, gold bullion has performed better than most other commodities over the past year, and more. Looking forward, gold bugs continue to call the gold bullion price to levels that sometimes look like telephone numbers. More sober calls have come from professional analysts, such as those at RBC Capital Markets, which "believe that a key underlying driver for the recent strength in the gold price has been the fundamental weakness in the dollar rather than strong fundamental demand for gold".

RBCCM points out that "it was only during brief periods of time when there were elevated levels of geopolitical risk (2005) or financial market risk (fourth quarter 2008 to second quarter 2009), that gold and the dollar showed positive correlation". There has been a strong inverse correlation between gold bullion and the dollar over the past 20 years.

The dollar-gold correlation since 1996 suggests that a 1% positive move in the dollar index (DXY) results, on average, in a negative -1.2% move in the gold bullion price. RBCCM comments that "while we occasionally see gold and the dollar positively correlate over short periods of time, the past few months have demonstrated the historical negative correlation".

Stock pricing patterns for more than 1,000 mining stocks listed around the world indicate that some investors remain sceptical over the potential further upside offered by specialist gold miners. So far this year, the highest stock pricing returns have come from specialist miners of silver, diamonds, copper, nickel, iron ore, and aluminium, followed by gold.

The exceptional returns for silver miners have been led by the biggest name, London-listed Mexican miner Fresnillo, which has so far risen by more than 700% from its lows, seen late last year. The global investible market capitalisation of specialist silver miners is relatively modest, at US$26bn, compared to the US$307bn offered by gold miners. Platinum, the other key precious metal, is yet to attract convincing investor interest, and offers a global listed investible market value in aggregate of US$55bn.