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Investors are rediscovering gold. And gold-mining stocks' recent strong performance has landed the group back on the list of industries with top Standard & Poor's Relative Strength rankings. Year-to-date through Nov. 15, the S&P Gold subindex rose 9.1%, vs. a 20.1% decline for the S&P Super 1,500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600).
S&P analyst Leo Larkin maintains a positive investment outlook for gold stocks. He notes that a sharp decline in interest rates since January, 2001, has made
short-selling of the metal by producers and market speculators less profitable. Short-selling has been a major negative for gold prices in the past several years.
Larkin has several other reasons for his positive outlook. He says equity markets are less likely to offer as much competition for investment demand. Double-digit rates of return for equities from 1995 through 1999 lured investor dollars away from gold and provided immense competition for the yellow metal.
SHINING THROUGH. Larkin also cites rising commodity prices, reflecting consolidation in commodity-producing industries and a recovery in global economic growth. Through November 11, 2002, the Bridge Commodity Research Bureau (CRB) Commodity Price Index was up 19.1% after a 16.3% drop in 2001. A rebound in the global economy and large increases in the U.S. money supply should lift commodity prices in 2003, according to Larkin. And that means inflation will still be a factor for investors to contend with -- playing to gold's traditional role as a hedge against rising prices for goods and services.
As for supplies of the metal itself, Larkin notes that the deficit between gold production and consumption will widen as output declines and demand increases. The low gold prices of the past several years have led to sharply reduced exploration for new mines, and will result in lower production even if the metal's price rises dramatically.
Also, the agreement by central banks to limit gold sales through September, 2004, to 2,000 tons, including sales by the Bank of Switzerland and the Bank of England (BOE), removes an uncertainty that plagued the market during the late 1990s. Central-bank sales in preparation for the launch of the European common currency, Australia's sale of part of its reserves in 1997, and the BOE's sales announcement on May 7, 1999, all helped depress market prices.
CHOICE NUGGETS. And finally, Larkin points out that the gold-mining industry is undergoing major consolidation. In 2001, Barrick Gold acquired Homestake Mining, and Newmont Mining acquired Australia's Normandy Mining in February, 2002. Mergers will result in larger market capitalizations and more trading liquidity in the stocks. This will make the group more attractive to institutional investors.
Larkin's current favorites in the group? He has a 4-STAR (accumulate) ranking on both Barrick Gold (ABX
) and Newmont Mining (NEM
). Larkin thinks both companies, with their low-cost mines, are well-positioned to capitalize on further price gains for the metal. He also likes Barrick's "rock-solid" balance sheet and rising free cash flow, and Newmont's aggressive debt-reduction efforts.
S&P Relative Strength Rankings These industries carry 12-month relative strength rankings of "5" as of November 15, 2002 -- meaning that they're in the top 10% of the 114 industries in the S&P Super 1,500 (the combined S&P 500, S&P MidCap 400, and S&P SmallCap 600) based on prior 12-month price performance.
*S&P's ranking system for the appreciation potential of stocks over a 6- to 12-month period: 5 STARS (buy), 4 STARS (accumulate), 3 STARS (hold), 2 STARS (avoid), 1 STAR (sell).
Stovall is chief investment strategist for Standard & Poor's
Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc.
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