By Kishori Krishnan Exclusive To Gold Investing News
Is it time to buy? Gold’s latest move above the $1,000 mark has stoked the long-standing debate between mining stock aficionados and bullion fans - what exactly is a better investment - gold bullion or gold mining shares?
Going by a year-to-date basis, bullion’s performance lags that of mining shares in 2009, despite the recent breakout. Gold shares have gained 15.5 per cent versus the Market Vectors Gold Miners ETF’s (NYSE Arca: GDX) - a portfolio of nearly three dozen global mining companies - 41.5 per cent appreciation in dollar terms.
Is that really surprising? After all, commodity stocks have led physicals this year. Take, for instance, the outperformance of the Market Vectors RVE Hard Assets Producers ETF (NYSE Arca: HAP) over the GreenHaven Continuous Commodity Index Fund (NYSE Arca: GCC). The HAP portfolio, comprising global equities, is up 35.1 per cent this year, while the futures-tracking GCC fund has risen just 10.3 per cent.
Like other commodity stocks, the strength of the gold mining shares depends, in part, upon the health of the broader equity market. A buoyant environment for stocks is wind at the back of gold shares. That’s pretty much reflected in the price ratio of GLD shares to those of GDX.
Collectively, mining shares produced about half the annual growth of gold bullion over the past three years. Still, certain issues such as Agnico-Eagle, Kinross Gold and IAMGOLD Corp generated outsized gains and, accordingly, earned the highest reward-to-risk ratios.
As a class, mining shares are clearly more volatile than gold. Sometimes, their higher risk yields compensatory rewards and sometimes not. If you are in for an additional layer of risk, then be prepared for a handsome pay-off.
The choice is yours to make.
Breakout attempts are always dicey, always a little scary and they rarely launch higher without a significant retest of the breakout at least once shortly after the event. Trouble is, speaking on a very short-term level, that breakouts above important, long-established, historic resistance fail about as often as or even more often than they succeed.
Even more trouble is that bearish technical interests love failed breakouts even more than bulls love the originals
So where does one go?
Follow the leader
Some prominent gold mining industry executives and analysts maintain that gold mining stocks are set to follow the gold price, given that record high gold prices are here to stay.
At the Denver Gold Group’s prestigious annual conference recently, power players spoke enthusiastically about gold’s future. Aaron Regent, CEO of the world’s largest gold miner, Barrick Gold (NYSE:ABX) was the most vociforous.
The miner is on-track to produce 7.2-7.6 million ounces this year. Regent maintained that the economic signs clearly potray that gold would not stumble - as it did when it briefly topped $1,000 an ounce in March 2008, before retracing its impressive gains all the way back to a low of $709 later that year.
The dark economic storm clouds which are continuing to amass means that gold price’s lofty level is poised to become a springboard for the metal’s next up-leg, suggested Charles Jeannes, CEO of Goldcorp (NYSE: GG).
Owner of one of the world’s largest gold producers, Goldcorp has a projected output of 2.3 million ounces for 2009. Jeannes said that continued inflationary fears and the prospect of an anemic US dollar “for quite some time to come” will continue to be potent drivers for gold prices.
“We’re certainly in a rising price gold environment right now… And there’s a lot of reasons to be bullish about gold prices going forward,” he added.
Former Goldcorp CEO Rob McEwen was far more explicit about what he expects gold will do next. The CEO of US Gold (NYSE.A: XG) - the exploration company that is making impressive headway in its hunt for significant gold deposits in Nevada and world-class silver discoveries in Mexico - was extremely bullish.
“Gold is going a lot higher. By the end of 2010, we will see $2,000 an ounce gold. And by the time that the gold cycle is over we’ll see $5,000 an ounce,” he declared.
Not letting go
Even the mid-tier to small gold producers at the Denver conference had plenty to say about the metal’s lustrous future. Joe Conway, CEO of mid-sized IAMGOLD (NYSE:IAG), which is on target to produce around 910,000 to 920,000 ounces this year, said $1,000 an ounce could be the new support.
IAMGOLD’s share price has been a stellar performer since it bottomed out a year ago, reflecting the company’s rising star. His take: The “massive financial stimulus seen in the US and globally will have to lead to inflation, setting the stage for an even higher gold price.”
CEO of Timmins Gold Corp (TSX: V.TMM), which is in the enviable position of becoming the world’s first ever gold miner to command a four-figure price for its inaugural gold bar, believed that we are entering into an era of deflation, which he expects to benefit gold prices.
With its projected mining costs at only $412 an ounce, 2010 promises to be a banner year as the company quickly ramps up its output to 80,000 ounces per annum.
The pressure on the dollar and lower crude prices have been exerting some tension to the gold price. In currencies trading, the euro-zone single currency rose as high as $1.4821, the strongest level since last September. The dollar fell to 76.118, down from 76.780 late Monday.
A weaker greenback typically boosts dollar-denominated commodities prices. Making a similar move, dollar-denominated crude futures rose back above $71 a barrel Tuesday.
Gold extended gains on Wednesday in Singapore, moving closer to an 18-month high struck last week, after the US dollar tumbled to its weakest in a year against the euro, but worries about heavy liquidation persisted.
The rise has stoked fears of a repeat of last year’s selling, when bullion lost more than $100 only a few days after it powered to a record $1,030.80 an ounce in March. Gold has gone up as much as 16 per cent this year.
Spot gold hit an intraday high of $1,017.80, still steady from New York’s notional close and within striking distance of an 18-month high of $1,023.85 hit on Thursday.
“At these levels here, obviously they need a further catalyst to get an upside. At the moment, the market will be coy on the basis that we’ve got now record high long positions on the CFTC,” said Mark Pervan, senior commodities strategist for ANZ.
“The market is quite concerned there could be some unwinding of those positions. If they really unwound heavily, I think we’ll go back to $950 very quickly. I suspect there’s a pretty strong floor at $995,” said Pervan, referring to this week’s 1-week low.
In New York, gold futures rose Tuesday for the first day in four, ending above $1,010 an ounce as a weaker US dollar boosted the metal’s appeal and as demand for gold exchange-traded funds showed improvement.
The dollar renewed its slide, falling to a fresh one-year low against the euro as the Federal Reserve began its two-day policy meeting Tuesday. Meanwhile, holdings in SPDR Gold Trust, the biggest gold ETF, rose more than 15 metric tons to the highest level in more than two months.
Gold rose in a “familiar formula of lower dollar, higher crude,” said George Gero, a precious-metals trader for RBC Capital Markets. “It’s almost like Yankees win and Mets lose most of the time.”
Some gold stocks and their last price are listed below
Barrick Gold Corp (ABX) $40.02
Agnico-Eagle Mines (AEM) $74.57
Goldcorp Inc (G.TO) $44.82
Newmont Mining Corp (NEM) $48.25
Newcrest Mining Ltd (NCM.AX) $32.23
Kinross Gold Corp (K.TO) $24.12
Eldorado Gold Corp (ELD.TO) $12.67