17/07/2012 - 09:30

Analysis: the gold canary starts to sing

17/07/2012 - 09:30


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An interesting event occurred on the Australian stock market yesterday, one that all investors should note because it could be good news, or bad. For the first time in months the top five stocks were all gold producers, or explorers.

Intrepid Mines, Gryphon Minerals, Evolution Mining, Alacer Gold and Beadell Resources topped the ASX with rises of between 14.5% (Intrepid) and 5.8% (Beadell) in a market which crept up 0.6% as measured by the all ordinaries index.

If it was just one gold stock on top it would not be worth mentioning because a single outlier could be reacting to specific news such as a discovery, production results, or takeover activity.

To have five gold stocks outperforming the overall market was a clear signal – that some investors believe the gold price is poised to rise sharply, and that many of Australia’s gold stocks have been over-sold.

Seasoned investors will say that we’ve been here before. Since hitting an all-time peak of close to $US1900 an ounce last September the gold price has fallen sharply to less than $US1600/oz.

The price, when last glimpsed, was still struggling to get over the $US1600/oz barrier, but it did perform well last week, and the reason for the increased interest in gold is that the overall flow of economic news is bad.

Europe remains trapped in a “gloom loop” of high debts and no growth. The U.S. economic recovery has dropped to stall speed, and no-one appears to believe the official Chinese economic growth rate of 7.6%, especially as electricity consumption is at the same level of a year ago and in every other country in the world the two always go hand-in-hand, unless one is rigged.

Leaving aside the question of market rigging, though the interest rate scandal emerging in London, and a possible repeat in the way the oil price has been manipulated, is part of the overall picture of a global economy reeling from crisis to crisis.

In other words, the groundwork is being laid on several levels for a flight to the relative safety of gold – a commodity (and currency) beyond the reach of governments, their printing presses – and also beyond the reach of bankers and their market-rigging games.

A rising gold price, while good for companies in that space, is invariably bad for everything else because gold often performs the role of a canary in a coal mine – it is first to sniff trouble.

On the Australian market, the gold sector has been hard to read over the past six months. The ASX gold index has fallen sharply, down 24.6% since the start of the year – due largely to the collapse in support for a single stock, Newcrest.

Despite its status as Australia’s leading gold producer and its dominant position in the index, Newcrest has slumped by 29%, leaving its supporters perplexed.

Other gold stocks have fallen further, including some of yesterday’s top five mentioned earlier. Intrepid, for example, even after its 14.5% jump, is still down 51% on its opening sales for the year.

But, when you go through the obvious major influences on the price of goldmining companies it is hard to explain why they have fallen so far this year.

The gold price itself as measured in U.S. dollars is, surprise, surprise, exactly where it was on January 3 (the first trading day of the year) -- $US1590/oz.

The Australian dollar also is exactly where it was on January 3, $US1.02, meaning that the Australian dollar gold price has not moved, even as gold shares have tumbled.

One day on the market does not make a trend. But it would be wise for investors to tick off the factors driving global markets today, and they’re not pretty, as a check list provided by Professor Nouriel Roubini, “Dr Doom” himself, shows.

He reckons the world is in for a very rough 2013 because economic policy makers have run out of options, Europe is a slow-speed train wreck about to become a high-speed wreck, the U.S. has stalled, China is heading for a hard landing, emerging economies are struggling and the oil price is poised to rocket higher if the dispute between Iran and the U.S. worsens after November’s U.S. presidential election.

And to that list can now be added the sound of the gold canary singing its early-warning song which is pleasing investors in gold, and worrying everyone else.


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