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U.S. Gold Mining Stocks Rise, But Gold Price Lags
By Alden Bentley  Reuters
NEW YORK — A spirited rebound in U.S. gold mining stocks may provide gold bugs with a rewarding investment alternative to the metal, which has lost some of its luster due to bearish supply and demand factors, analysts said.

But if gold prices do not jump on the bandwagon soon, mining companies' stocks could lose their pizzazz, they said.

"The stocks are forecasting higher prices but they are wrong," said Peter Ward, mining analyst at Lehman Brothers. "The trade I like at this point is to be long the metal and short stocks, because either I'm wrong and the metal does rally, in which case it's already built into the stocks, or it doesn't rally and these stocks are grossly overvalued."

As of early Friday, shares in North American gold and silver producers, as measured by the XAU Mining Equity Index .XAU) on the Philadelphia Stock Exchange, were up 34 percent this month. On Friday afternoon, the index was at 72.51, off its morning high of 75.69.

The XAU composite, which includes such U.S. and Canadian mining giants as Barrick Gold Corp. and Newmont Mining Corp., finally responded after broader indices like the Dow Jones industrial average and Standard and Poor's 500 paraded to new record highs this year.

The American Depositary Receipts of Barrick Gold were off 81.25 cents at $19.875 a share on Friday on the New York Stock Exchange, after hitting an intraday high of $21. Newmont Mining's stock had slipped 18.75 cents to $23.6875 by Friday afternoon, after rising earlier in the day to an intraday high of $24.1875, in composite New York Stock Exchange trading.

U.S. gold stocks have not advanced in isolation. Shares of gold miners traded in South Africa, the world's largest producer, hit a one-week high on Friday, in tandem with a rebound in spot bullion prices after a sell-off on Tuesday.

But while U.S. gold producers earn kudos for slashing their cash operating costs, the industry is still suffering under the current market environment and its future hinges on price recovery, analysts said.

"(Gold stocks) had overshot on the downside in terms of valuation, because I believe they were discounting gold continuing to go lower," said Thomas McNamara, mining analyst at CIBC Oppenheimer. "Yet, the gold price is not going lower. So they are trading back up more to parity with gold prices."

In fact, spot gold prices, up 2.6 percent in the last three days, seem to be taking a cue from the sudden rally in equities, which underperformed through March as gold languished not far above last August's 19-year low of $271 an ounce. Since then, gold's weakest point came on April 5, when it bottomed at $277 per ounce.

On Friday, spot gold peaked at $287.50, the highest since March 15. But by midday Friday, the gold rally was losing steam amid talk of selling by producers, who often seek to lock in prices for future mine output. In New York, spot gold at midday was quoted around $286.55 an ounce, up from around $286.05 at Thursday's close.

While demand for gold has outstripped mine supply in recent years, sales and leasing of gold by central banks — eager to reap a return on gold monetary reserves that would otherwise yield no interest — have increased the amount of metal on the market and forced prices lower, analysts said.

Low inflation and weak global commodity prices have eroded gold's traditional role as a hedge against price rises.

A boom on Wall Street and in Asian stock markets, which are recovering from the 1997-1998 emerging market crisis, were also a disincentive for investors to hold gold, or gold stocks.

Industry veterans said there was an observable relationship between equity and metal prices. But they said the correlation is temperamental and it is too early to predict whether or not gold will share in a bull market on par with mining stocks.

"If you are trying to decide whether to buy gold or buy mining stocks, you might buy mining stocks because you get a compound effect," said a trader at a bullion bank in New York. "In other words, the shares would increase; historically, they have increased by a greater percentage than the increase in the gold price."

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