Are gold stocks in a bear market?

For seven months, investors have been steadily selling down gold stocks; the 100 least wanted have lost half their value.

Author: Barry Sergeant
Posted: Friday , 22 Jan 2010

JOHANNESBURG -

Are listed gold stocks in a bear market? Whether the answer is yes or no, the position could change in an instant. For the meantime, stock pricing patterns of more than 500 gold stocks indicate that this global mining subsector, boasting an aggregate market value of just over USD 300bn, continues to take a beating. The signs have been there for ages, in stockmarket-time anyway.

For some seven months, investors on all continents have shown an increasing hesitancy in buying listed gold stocks, even as the gold price increased over the period from around USD 950 to over USD 1,120 an ounce, briefly, in the early part of December. Dollar gold bullion has since retreated to just below the USD 1,100 an ounce mark. Listed gold stocks staged a brief rally in early December, but have rapidly retreated. Barrick, the biggest name in the game, is currently quoted at USD 36.52 a share, a couple of dollars below levels seen in June 2009.

The loosely defined Tier I global gold stocks grouping, comprising 13 names, is currently trading at an average of 26% off 12-month highs, and 23% down on weighted averages. While this measure does not adjust for currency differences, there are some investors who take a decline of at least 20% as a sign that a bear market has set in. Not to belabour the point, this could all reverse very quickly, but for now, the pricing of gold stocks sends a sombre message

Since late June 2009, measured on 12-month rolling stock price returns, investors have been net sellers of gold, uranium and silver stocks. Portfolio flows have been positive for all other discernable listed mining subsectors; the most favoured areas have been diamonds (a relatively tiny subsector, with investable market value of some USD 3.2bn), nickel (USD 37.6bn), emerging iron ore (USD 131.4bn), coal (outside China) (USD 76.6bn), and platinum (USD 67bn).

Among Tier I gold stocks, the heaviest selling has been seen in the case of Harmony, which faces a mixture of headwinds in South Africa, where all its current operations are housed, unlike country peers AngloGold Ashanti and Gold Fields, which are both well diversified outside the country, and own, on average, higher quality assets within it. The least affected Tier I gold stock has been Polyus, buoyed by very strong general demand in Russia's stockmarkets.

Among Tier II gold stocks, selling has captured most stocks; the least impacted include Eldorado and Red Back (an African miner). Franco-Nevada, a royalty company rather than a miner, was holding pretty well, but slid 10% on Thursday. Prior to that it was tracking changes in the gold bullion price, in line with exchange traded funds like the SPDR Gold Shares ETF, which boasts a current market value of USD 39bn, overshadowing the USD 36bn attached to Barrick. Price wise, this ETF has fallen less from its highs than any Tier I gold stock, and practically any listed gold stock.

Further down the size scale, investors have also eagerly taken significant profits on gold explorers and developers, and redeployed the cash elsewhere. Canada-listed Colombia explorer Ventana Gold, one of the world's top performers of any kind during 2009, has seen its market value decline from USD 1.2bn to USD 624m, a fall of just under 50%. Galway Resources, which also hit paydirt close to Ventana, has lost a third of its value; Greystar, further up the road and with the most advanced project by far, has surrendered a quarter of its value.

Seen over the past year, investors have apparently decided that listed gold stocks have moved right across from the fast lane, to the slowest lane, and possibly into the emergency lane. Measured on a weighted basis, the world's 100 least-wanted listed gold stocks have lost just over half of their value, compared to the 22.5% surrendered by the 13 Tier I gold diggers. The world's 100 biggest mining stocks, by market value, have declined by an average of 15.8%, confirming the notion that listed gold stocks are underperforming - for now, anyway