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James Turk: Gold tests important support
By Nicole Mordant
Reuters
Saturday, May 14, 2005
http://www.reuters.ca/locales/c_newsArticle.jsp;:428690cd:fbf68850ced
f576?type=businessNews&localeKey=en_CA&storyID=8492877
VANCOUVER, British Columbia -- The Rolling Stones' smash hit "(I
can't get no) Satisfaction" may be on the lips of many Bay Street
gold stock investors and not only because the legendary rockers
announced this week that they'll play in Toronto in September.
Unlike the seemingly ageless and fit-looking rock stars, gold shares
listed on the Toronto Stock Exchange appear decidedly haggard,
having lost on average 18 percent of their value so far this year.
And, if some analysts are right, the bleeding isn't over.
"Reading the (earnings) reports from Barrick, Placer, and Newmont
resembles that of a hospital. Each company has a number of mines on
the 'sick list' and some in intensive care," said Michael Fowler of
Desjardins Securities in a note to clients.
Some of the world's biggest gold producers call Bay Street home,
including No. 3 Barrick Gold Corp., No. 5 Placer Dome Inc., and No.
7 Kinross Gold Corp.
The poor performance of Canadian gold stocks, mirrored in the United
States, might seem unusual given that the gold price looks fairly
sturdily ensconced above $400 an ounce -- a sort of "golden
threshold" that the metal burst through late in 2003 after wallowing
far below that for more than seven years.
"Investors seem to be disappointed by the higher prices of gold not
passing through into higher earnings per share," said Martin
Murenbeeld, Dundee Wealth Management's chief economist.
Mining companies are more than half way through the first quarter
reporting season and their refrain of soaring costs crimping margins
is by now common.
Between January and the end of March, Barrick's cash costs jumped 25
percent, Placer Dome's rose 19 percent, and Newmont's were up 12
percent. Both Placer and Newmont raised their 2005 cost forecasts
and some expect Barrick will do the same.
Miners have generally blamed the cost surge on the higher price of
oil, lower gold grades, and on local currencies that have risen
against the U.S. dollar, making costs more pricey.
Even though the gold price is not looking too shabby, it's more than
$30 off the 16-year highs above $450 that it hurtled to in 2004,
sending disappointed investors to the exits.
"Gold really needs to break to a new high to convince people that
the rally is still alive -- that there's going to be enough move at
the (miners') revenue line to overcome all the problems we know are
taking place at the cost line," said Victor Flores, gold analyst at
HSBC Securities in New York.
But if his industry colleagues at Merrill Lynch are right, the price
could get worse before it gets better.
According to the investment bank, the gold price and gold equities
have fallen in the late spring to mid-summer almost every year since
1989 because of seasonal factors, including the end of the jewelry-
gobbling wedding season in India and as European fabricators let
gold stocks run down.
"Bullion could decline to $410 an ounce by July," Merrill cautioned
in a report last week. But it sees the dip as short-lived and is
still targeting a $440 average in 2005.
The biggest driver of bullion's run-up in the current cycle is
weakness in the U.S. dollar, as a softer dollar makes the precious
metal cheaper to buy in other currencies.
But the greenback hasn't fallen as much as many expected and even
Murenbeeld, well known in the gold industry for his gold price
forecasts and a self-proclaimed "dollar bear," has lowered his
predictions.
Bullion was stuck near three-month lows of $419 an ounce on Friday,
weighed down by a rise in the greenback after surprisingly strong
U.S. economic data. The Toronto Stock Exchange gold index fell 8
percent over the week, helping to depress the overall market 2.5
percent to 9,278.45.
Some industry players have blamed gold share weakness on the launch
of new bullion investment products, called exchange-traded funds, or
ETFs, that give investors an avenue other than stocks for getting
exposure to the gold price.
But others like HSBC's Flores said ETFs trade only a slim one to two
million contracts a day. "That is not enough volume to account for
the death and destruction that we have seen in the gold equities,"
Flores said.
For the next few months, investors may find it more lucrative
trading in Rolling Stones tickets than gold shares
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Ted Butler silver commentary archive:
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----------------------------------------------------
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