gold stocks disappoints

Gold stocks suck - and bullion disappoints

With the exception of uranium stocks, no mining sub-sector is suffering as much as the gold share market.

Since recent tops close to $700 an ounce in April this year, gold bullion has been under pressure from dwindling global liquidity growth, following policy tightening and rising real interest rates. The unexpected meltdown in credit market liquidity, starting earlier this month on the back of the US subprime crisis, triggered the separate phenomenon of a significant sell off in stocks.

This narrowed the breadth of assets attractive to investors, but commodity and metals stocks have taken an especially serious hiding. With the exception of uranium stocks, which have fallen by a rough average of 50% from 12-month highs, gold stocks have suffered the most serious sell off among metals shares, with a decline of 34% from 12-month highs.

This compares with falls of 7% in the Dow Jones Industrial Average, 8% in the Standard & Poor's 500, 8% in the Nasdaq Composite, and 10% in London's FTSE 100. Platinum stocks, peppered, like uranium stocks, with opportunists, have also taken a serious hiding, particularly among those at the junior level. There have also been serious production and cost issues at the senior platinum stocks.

From high

Dow Jones
-7.1%

S&P 500
-7.5%

FTSE 100
-9.5%

Nasdaq
-7.6%

Mining stocks

Major diversifieds
-17.6%

Gold
-34.1%

Tier I
-24.7%

Tier II
-27.9%

Tier III
-37.7%

Developers
-36.3%

Platinum
-33.1%

Tier I
-26.9%

Tier II
-28.7%

Developers
-39.1%

Copper
-18.9%

Nickel
-26.0%

Zinc
-27.0%

Uranium
-50.2%

Markets have been wildly volatile for weeks. But prior to the severe correction in stock markets during early August, signs were already suggesting that, superficially at least, the environment for commodities and metals was deteriorating. Chinese authorities were taking measures, once again, to slow the world's fastest-growing big economy, and US data continued to show that the world's No 1 economy had expanded at a sub-3% pace for five consecutive quarters.

Early in June, moreover, US Treasury bond yields were rising, an indicator that historically suggests that commodity prices, and commodity stocks, come under pressure. But just prior to mid-June, Treasury yields started falling, traditionally a positive sign for the commodities complex. Yet while Treasury yields have continued to fall - from just above 5.2% on the 10-year bond in the second week of June to 4.5% currently, metals pricing performance has been all over the place.

The performance of gold bullion and gold stocks has been particularly appalling, given that the recent credit markets crisis has narrowed asset choices, but apparently excluded gold. Gold bullion, in particular, has historically ranked as a "safe haven" asset, but this time around, it has behaved in a demonstrably contrarian manner.

As if to adding insult to gold's injury, the ongoing boom in global capital spending and income gains in emerging economies have more than offset weakness from the US housing and subprime markets. A number of commodities and metals have simply continued to forge ahead, not least crude oil and copper.

The Bank Credit Analyst points out that the narrowing breadth of asset price inflation is a typical characteristic of a maturing market. In this cycle, say analysts, commodities, government bonds, real estate and credit products have already largely been inflated but stocks still have room for further multiple expansion once the current turmoil in the credit market subsides. So far, only major diversified resources stocks, and perhaps copper stocks, have indicated positive sentiment since the sell off early in August.

By Barry Sergeant - 29 Aug 2007