Gold stock “buy” signal pops up
The spot-gold to Philadelphia gold & silver index ratio is
currently predicting a 22.5% return for a one-year stock holding.
Author: Barry Sergeant
Posted: Wednesday , 18 Apr 2007
JOHANNESBURG -
Gold stocks have performed atrociously for a year or more, with the
majority of names way below 12-month highs. Among the big stocks,
Harmony (NYSE: HMY) stands as the sole exception, currently trading
at $16.28 a share, against a 12-month high of $17.76. Dollar gold
bullion itself is hovering around 11-month highs, close to $700 an
ounce, but what does that say about the value of stocks?
Myles Zyblock, RBC Capital Markets chief North American
institutional strategist, has long argued that among numerous gold
stock value indicators monitored, the one with the best track record
is one of the simplest. This, of course, is the ratio of the dollar
gold spot price to the Philadelphia gold & silver index, known as
the XAU.
For the first time in years, it was on March 13, 2007 ,that the
gold-to-XAU ratio crossed above the 5.0 times threshold. At or above
this level, of 32 observations in the past 24 years, only one has
returned a negative for holding of gold stocks. For the balance of
31 observations, the average return for holding gold stocks for one
year is 40%.
The gold-XAU ratio currently stands at 4.7 times. The ratio at this
level has typically signalled a 20 to 25% upside in gold stocks for
those with a one-year holding period. At this juncture, Zyblock also
points out that gold equity analysts had turned increasingly
negative on the earnings outlook for gold stocks over the past seven
months, to the point where the level of pessimism reached an extreme
for this cycle. However, Zyblock adds, "in the past month estimate
revisions look like they have started to turn up from the abyss."
As to the fundamentals, the "Bank Credit Analyst" earlier this year
identified four pillars cementing the case for a long-term bull
market in gold bullion. First, global liquidity settings, which are
seen as likely to remain "plentiful because inflation will stay
low". Second, the reality that investor demand for gold will rise in
response to higher gold prices, after an extended bear market. While
this may sound counterintuitive, the profile of the dollar gold
price since early in 2002, when the latest bull market set in,
closely shadows the progression of the dollar gold price during the
1970s, the previous gold bull market.
Third, central bank transactions in gold bullion, said BCA Research,
"could take time to re-emerge after the wave of liquidation in
recent years". Fourth, Chinese and Indian private sector gold demand
was seen as likely improving as the wealth and incomes of
individuals in those countries continued to rise.
As to particular stocks, specialist investors are currently drawn to
the likes of Goldcorp (NYSE: GG, $26.53 a share) and Kinross (NYSE:
KGC, $14.38), and among the mid-tiers, Centerra (TSX: CG, C$26.53),
IAMGOLD (NYSE: IAG, $8.12) and Agnico-Eagle (NYSE: AEM, $38.33).
From www.mineweb.co.za