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Some hope

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Gold Stocks (GDX) Sink, Low Prices “Unsustainable”
Wednesday, June 1, 2011, 11:01am EST. Written by GoldAlert Staff.
GOLD STOCKS NEWS – Gold stocks moved lower across the board Wednesday morning despite a flat gold price. The Market Vectors gold Miners ETF (GDX) slid
.63 to $57.52 on the back of broad-based weakness in equities and commodities. Gold stocks continue to underperform the price of gold, a phenomenon that has led to increased fund flows in gold bullion exchange traded funds such as the SPDR Gold Trust (GLD) relative to the large-cap gold stocks. The GDX is now lower by 6.2% thus far in 2011.

While gold stocks have underperformed the yellow metal, according to Macquarie the sector valuation discount is “likely unsustainable.” The investment bank noted that “North American gold equities are currently trading at a 29% discount to NAV compared to the previous five-year typical range of 1.0x to 1.4x NAV. The equities are currently pricing in a gold price of ~$1200/oz, 19% below spot.”

Macquarie’s “top picks” among gold stocks are “Kinross, Agnico-Eagle, Yamana, Northgate and B2Gold.” Shares of Kinross Gold, Agnico-Eagle Mines, and Yamana Gold all moved lower this morning.

While gold stocks have traded to the downside due to rising input costs and overruns with respect to CAPEX, the key driver of the sector over a longer time frame is the price of gold. “Gold producer margin expansion has slowed with rising industry cost inflation pressures from labour, energy, and reagents, and new royalty regimes and currency headwinds, ” according to Macquarie analyst Tony Lesiak.

If the research team at Macquarie Capital Markets continues to correctly forecast the macro-economic outlook, then gold stocks should have a tailwind at their backs. In a note to clients this morning, Macquarie’s team reiterated their bullish stance on gold and gold stocks: “As long as sovereign risk issues overhang the world’s three major currencies, investors will look for insurance though diversification and will be attracted to other assets – Swiss Francs, CAD, AUD, and in particular, gold. We continue to recommend gold and gold equities and expect the gold price to reach $2000/oz in 2012. We expect a positive environment for gold to persist thereafter.”

Macquarie analysts have correctly forecasted stronger gold prices, focusing on not only the negative real interest rate backdrop, but also the global “concern over future debasement of the world’s paper currencies.”

Gold stocks may be out of favor right now as skepticism over their ability to deliver profits remains high. However, the negative year-to-date performance of the GDX and other gold stock indices could quickly turn positive if the gold miners can demonstrate that their costs are under control. The leverage delivered by the large-cap gold stocks in recent years has been dismal. It is time for the executives at gold companies to finally deliver on their promises to investors.