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
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
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