The latest word on which gold stocks may glitter
Even when the price of gold surges, many gold stocks lag behind. This advisory tracks the twists and turns of gold and names the best plays.
When gold hit $550 an ounce in 2005, there was a great deal
of buzz about whether it might return to its all-time high of $850 an
ounce — that exalted figure had been reached in 1980. In January
of this year, gold futures breached the $1,000 mark.
In fact, the 1980 high still stands if you account for inflation.
That $850 ounce of 1980 gold would be worth about $2,477 in today’s
U.S. dollars. But that doesn’t make the recent high any less spectacular.
And now gold has spiralled down almost $100 from that high.
Following the dizzying trail of the price of gold is a fascinating study
in itself, but the real question is: what does it mean for investors?
Is gold a haven of safety in troubled markets, or just another
commodity for speculators to haggle over? If it does offer safety, where
should you invest, in bullion or gold stocks? And why don’t more
gold stocks do well when the price goes up?
Three things should be kept in mind. The demand for gold
jewellery makes a difference in the price of gold, especially in the evolving
economies of Asia. There, the demand has held up even when gold prices
have soared, and even when it has fallen off in the industrialized nations
Second, gold generally moves in the opposite direction of
the U.S. dollar. In the long run, the U.S. current account deficit is
liable to weaken the dollar and keep gold buoyant.
Third, gold’s role as a hedge may be tested again if
the desperate measures used to curb the credit crisis kick off another
round of inflation.
We’ll take a look at the progress of gold through the
eyes of Ian McAvity’s Deliberations on World Markets. Mr.
McAvity has a few choice words on where the price of gold might be going
and a handful of gold stocks he likes.
A very stupid trade
Late in March, after gold had hit the magic $1,000 mark,
a big sell-off occurred. All of a sudden, tongues were wagging about another
gold “bubble”, just like the one that had seen it plunge from
its $850 high in 1980. Absurd, says Mr. McAvity.
The recent run of gold, he pointed out, showed a gain of
60 per cent within an orderly progression up the charts. In 1980, gold
rose by an explosive 266 per cent on its final run, an “exponential
blow-off that burst,” says the editor.
Could we see gold fall beneath $800 under the pressure of
a huge decline in the S&P 500? If so, says Mr. McAvity, he would get
very bullish under $800.
“But traders, don’t take that as a ‘Call’
for a sub-$800 target and short it,” he says. “That would be
a very stupid trade in my book. For that to occur, I suspect the triggering
would come from financial stocks choking on another round of ‘surprises’.”
Another Bear Stearns, perhaps.
Dismal relative performance
Subsequent to the steep drop of late March, gold has pulled
itself back up and is moving in the $910 region. Mr. McAvity believes
we “may yet see a further testing of the recent highs on gold and
silver, but they will need a digestive cooling off phase.”
But how do you deal with these shifts in price as an investor?
If you own gold bullion, you’re probably taking the
long view. The difference in price from one month to the next should not
unduly affect you, however sharp it might be. (You’re also likely
paying storage fees, but that’s a decision you make in the interests
of safety.)
But if you’re investing in gold stocks, you have a different
point of view. For one thing, you’re faced with “the dismal
relative performance of the major gold mining shares relative to gold,”
which Mr. McAvity illustrates with several alarming charts.
Your starting point, the editor states, should be with the
gold mining indexes, and one in particular. It’s not the traditional
AMEX Gold BUGS Index (HUI).
In Mr. McAvity’s view, the best index for gold stocks
today is the Amex Gold Miners Index (GDM). It gives him the best reading
for his extensive charts on the progress of gold.
It is also the index that the Miners Exchange ETF
(AMEX-GDX) is based on. And this exchange-traded fund “will work
on its own as an index play,” if you’re not prepared to own
individual gold stocks, says the editor.
There’s another index that works as well, and this one’s
on the Toronto Exchange. It’s the Horizons BetaPro S&P/TSX Global
Gold Bull Plus ETF (TSX-HGU). Or if you’re bearish on gold (a good
thing to be last month) you could opt for the Horizons BetaPro S&P/TSX
Global Bear Plus ETF (TSX-HGD).
Between these three indexes, you can invest in gold without
ever dipping into individual stocks. Still, there are a handful of stocks
that have held up well, despite the “dismal” performance of
the group as a whole.
Five stocks have acted well
Mr. McAvity believes that the best approach to gold stocks
today is to buy on weakness. While they may not always rise in concert
with the price of gold, even the strongest gold stocks seem to flag when
the price of the precious metal goes down.
There are some major stocks to be avoided. All the South
African gold miners, for instance. A North American major is on the same
list. Newmont Mining Corporation (NYSE-NEM; TSX-NMC) “has
been acting like an escapee from the dog pound worthy of continuing avoidance,”
he comments caustically.
But five big Canadian firms get the thumbs-up. Yamana
Gold (TSX-YRI; NYSE-AUY) “sure is getting touted on CNBC a lot,”
notes the editor, but four other companies “have acted well too.”
They are: Kinross Gold (TSX-K; NYSE-KGC), Agnico-Eagle Mines
(TSX/NYSE-AEM), Goldcorp (TSX-G; NYSE-GG) and Barrick Gold
(TSX/NYSE-ABX).
“My favorite buys will be from this group,” Mr.
McAvity concludes. “depending on who goes down in a fire sale. I’m
more interested in bargain price than name.”
The yellow metal may be the world’s oldest investment,
and its most puzzling. Is gold the best hedge against risk, or a risky
investment that may pay off? They were asking that question long before
the pyramids were built, and we still don’t have the answer today.
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