With gold prices at 17-year highs — up more than 5% since the Friday before Hurricane Katrina hit the U.S. gulf coast — investors are weighing whether there still is upside to the prices of gold stocks.
Valuations suggest there may be better buying opportunities, especially since gold stocks in S&P’s coverage universe have climbed approximately 20% since August 26th.
“Since we see little upside potential at this point, we do not recommend adding to holdings” of gold-producing stocks like Barrick Gold Corp. (ABX), Newmont Mining Corp. (NEM) or Placer Dome Inc. (PDG), says Leo Larkin, S&P’s gold equity analyst.
Similarly, S&P recommends against investing in gold directly. “In general, we think gold is a bad investment because it is very seldom that gold outperforms any other investment, like stocks or bonds,” says David Wyss, chief economist at S&P.
Still, investors may be wondering why the price of gold continues to surpass its already tony levels. Overnight, December gold futures reached a high of $471.05 and spot gold jumped to $474.90. There are many reasons. Erratic returns in other asset classes may have driven some investors to gold this year. Also, “we believe the low level of gold prices in the late 1990s led to sharply reduced exploration, which we think will result in flat to lower production even if the metal price rises dramatically,” says Larkin. In other words, demand is outstripping supply, leading to higher prices, a refrain echoed by close observers of oil prices. Crude futures jumped 7% yesterday, settling at $67.39, on fears of another hurricane barreling down on the already-strapped oil production and refining capabilities in the Gulf of Mexico area.
However, few market observers see either of these commodities’ high prices as sustainable. Wyss said that he believes that currently high gold prices are susceptible to downside risk because of the historic influence of oil prices on gold. Gold prices tend to rise when oil prices do the same; conversely, both commodities tend to fall at the same time. Wyss cited some evidence that oil producers appear to be taking profits to buy gold. He said he expected this gold-buying trend to halt as oil prices likely reverse and momentum in other asset classes, such as currencies, likely gain investors. S&P sees a year-end per-barrel oil price of $62, falling to $52 by the end of 2006.
Doug Groh, senior investment analyst at Tocqueville Asset Management, the company behind the $500-million Tocqueville Gold Fund (TGLDX), sees gold’s future support level at around $439 an ounce, or pre-Hurricane Katrina prices. He said he doubts gold prices would go much below that.