The gold price dipped $4.35 to $1,484.91 on Tuesday amid further weakness in the commodities complex. With yesterday’s sell-off, the gold price fell for the third consecutive trading day and extended its weekly loss to 1.1%. The SPDR Gold Trust (GLD), the world’s largest gold ETF and a proxy for the gold price, finished lower by $0.63 at $144.74 per share.
In a rather rare development thus far in 2011, gold equities shrugged off the decline in the gold price and finished in positive territory. The AMEX Gold Bugs Index (HUI), a basket of the world’s largest gold companies, ended the day with a 5.04 point, or 1.0%, gain at 523.42. Notable advancers on Tuesday included Goldcorp (GG), IAMGOLD (IAG), and Randgold Resources (GOLD). Shares of GG, IAG, and GOLD settled higher by 0.5%, 1.8%, and 1.8%, respectively.
While it is too early to say if today’s outperformance by gold equities marks a change in trend, it is a particularly encouraging sign because most large-cap gold shares have substantially trailed the gold price year-to-date.
In a note to clients this morning, Macquarie metals and mining analyst Tony Lesiak highlighted the headwinds facing the gold mining equities: “Gold producer margin expansion has slowed with rising industry cost inflation pressures from labour, energy, and reagents, and new royalty regimes and currency headwinds. Capital costs have recently risen to peak 2007 levels. Sector dividend growth has been well below expectations as many management teams appear reticent to return cash to shareholders despite admittedly overpriced acquisition opportunities. Recent strategic decisions by Barrick, the industry leader, have not helped improve industry appeal.”
Commenting on the recent weakness in the gold price, analysts at Scotia Mocatta wrote in a note to clients that “One thing is for sure, with comments about the potential for a ‘hard landing’ in China, USD-denominated commodities in general remain on the back foot, and in the short term, gold will go along for the ride.” The firm forecasted that the price of gold could fall to $1,445 and “possibly beyond” in the short-term if the sell-off in commodities accelerates.
“No doubt the catalyst for this move will come from the industrial metals,” Scottia Mocatta noted, “and in particular silver which is still struggling to get out of its own way (if the recent lows at $32.33 were to fold then it would be a case of $25).” As a result, “with gold not exactly firing on all cylinders in its own right, it really is at the mercy of a weakening commodity sector in the short-term i.e. sentiment is still negative and as such they believe there will be better opportunities to re-enter the market on the long side.”
While the gold price may face additional headwinds in the short-term, the longer-term outlook appears bright due in part to mounting concerns over the sovereign debt crisis in Europe. In a Bloomberg interview, Mohamed El-Erian of PIMCO stated that the likelihood of a Greek default or restructuring has risen since the arrest and rape charges brought against Dominique Strauss-Kahn, Managing Director of the International Monetary Fund (IMF). “Don’t underestimate how important Dominique Strauss-Kahn was in coordinating action” among European policymakers, El-Erian stressed. It’s the worst possible time to lose your general. You need the IMF to coordinate this global healing.”
Strauss-Kahn “has been getting everybody to play from the same sheet of music,” according to El-Erian, CEO of PIMCO and a former deputy managing director of the IMF. “Without him it will be much more difficult to coordinate European governments.” Source www.goldalert.com...
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