Hedge funds and speculators, in particular, have left lots of wreckage across all lanes of the global resources highway, but as in the case of any pile up that can be seen from outer space, there are gems hidden all around and within the carnage. One of the finest ideas that made landfall on Tuesday, following one of the worst days in global credit, equity, commodity and currency markets history, was that the pricing of listed gold stocks is at an all time low vs the dollar price of gold bullion.
Some specialist traders believe that first, gold bullion is poised for a sharp correction back to physical demand support at $800 an ounce from current levels around $775 an ounce, and that, second, listed gold equities will rally in line with a broad based equity rally.
PRECIOUS METALS
USD/oz
From high*
From low*
Gold
875.50
-15.2%
20.4%
Platinum
998.15
-56.6%
7.5%
Palladium
200.75
-66.3%
3.7%
Silver
11.44
-46.4%
11.4%
* 12-month
Earlier on Tuesday, with gold bullion at $882 an ounce, and the Philadelphia Gold and Silver (XAU) trading at 105, a ratio of 8.4:1 was produced, an all-time extreme level, translating directly into the message: "gold stocks cheap, gold bullion expensive". The world's 13 listed gold stocks that comprise the global Tier I grouping are currently trading at a weighted average of 53% below peak prices, hit just months ago.
The average explorer and developer, or junior, gold stock is trading a massive 71% below price peaks, also seen just months ago. Some Tier I names have suffered aggravated price losses due to regional issues: Polyus, down on extreme turmoil in Russian equity markets; Zijin, down on the bursting of a general equities bubble in Chinese markets; AngloGold Ashanti and Gold Fields, down on various South Africa related, and Freeport-McMoRan, down on its exposure to copper, which it ranks as its primary output. On the flip side of regional issues, Australian dollar gold prices on Tuesday made 25-year records at AUD1 210 an ounce.
This puts a positive light on Newcrest, currently one of the world's top performing gold stocks, not least on the back of its Australian dollar cost base, good sovereign risk, and growth story. Barrick, the world's biggest gold stock in terms of ounces mined, and also most heavily capitalised, is also trading well, on its liquidity, balance sheet strength, low sovereign risk, and relatively low base metal revenue contribution. Newmont is also trading well; it is the only gold stock in the S+P 500, and offers the additional attractions of a dollar cost base and unhedged gold production.
In more general terms, specialist traders believe that gold bullion should be sold as the global credit markets thaw proceeds, and that gold equities should be bought. It is fairly widely anticipated, however, that gold bullion will head up to new highs in 2009, surpassing its record dollar levels seen in March this year.
