GOLD PRICE NEWS – The gold price traded lower Monday morning, falling $3.00 to $1,499 per ounce. The price of gold broke through a number of support levels last week as it plunged over $60. A stronger U.S. dollar has weighed on gold, silver, and the broader commodity complex in recent weeks. Sovereign debt worries, which have depressed risk appetites among investors, continue to dominate the headlines with key votes by the Greek and Italian parliament over austerity packages set to take place later this week.
The Global Precious Metals Team at TD Securities highlighted support levels for the gold price roughly 2.5% below current levels: “Short term support remains at $1,470 where gold has held a few times on recent sell-offs and we keep hearing rumors of central bank buyers below. We would look to buy gold at $1,470 should we see it and job the range up to $1,510.”
On Friday the gold price tumbled $18.50 to $1,502 per ounce amid widespread liquidation in global financial markets. Silver dropped alongside the price of gold, sinking $0.92 to $34.29 per ounce. Silver prices moved lower yet again Monday morning – falling $0.44 to $33.84 per ounce.
Weakness in the gold price has pressured gold equities over the course of June as the AMEX Gold Bugs Index (HUI) has dropped 7.1% this month. Canadian-based Barrick Gold (ABX) and Goldcorp (GG), the world’s two largest gold producers, fell 9.8% and 6.5%, respectively, in June.
Although gold equities declined on Friday, the HUI managed to break a three-week losing streak, closing higher by 3.3%. More importantly, however, was the fact that the sector finished in positive territory despite the considerable move lower in the gold price.
The underperformance of gold shares relative to the price of gold in recent years has not been lost on investors. Year-to-date, the HUI has fallen 10.5%, compared to an $81, or 5.2%, rise in the gold price. In light of the sector’s weakness, the latest firm to reiterate its bullish outlook on gold equities was Macquarie.
In a report to clients on Friday, Macquarie Capital Markets Canada wrote that “This underperformance has been particularly concentrated in the last three months, where we have seen the S&P/TSX Gold Index in US$ (-10.0%) underperform the spot price of gold (+5.8%). The underperformance of gold stocks relative to bullion has been much more dramatic than for other commodity stocks.”
In addition, the firm contended that gold shares are “extremely cheap,” based on the fact that the sector’s average price/net asset value multiple is at its lowest level since February 2009, and has dropped 28% over the past year.
In its research, Macquarie looked at the historical performance of the S&P/TSX Global Gold Index versus the gold price over the past decade. Aside from the unprecedented 2008 financial crisis, the firm noted that divergence between gold shares and the metal is currently the largest since 2003. “Following these instances,” Macquarie wrote, “on average, the TSX Gold Index has returned 49% over the next 12 months, outperforming gold by close to 25%. What’s more, about half of the outperformance tends to occur in the first month following a peak outperformance of gold.”
Based on the relative strength in gold shares this past week, the firm contended that “It is possible we are seeing the beginnings of a trend reversal right now.” While it acknowledged that “a sustained recovery in the performance of gold equities relative to bullion is likely to require sustained strength in equity markets,” Macquarie argued that such a development could begin early in the second half of this year.
Macquarie concluded that “We believe both the price of gold and gold equities will move higher in coming months as expectations for Fed rate hikes are pushed out and sovereign risk concerns increase demand for alternatives to mainstream currencies.”
As for specific gold equities, the firm’s “top picks” included Agnico-Eagle Mines (AEM), Kinross Gold (KGC), and Yamana Gold (AUY) among large-cap names. Among small- and mid-cap gold companies, Macquarie’s highlighted ATAC Resources (ATC.TSXV), and B2Gold (BTO.TSX).
