|
During the dog days of summer, the price of gold customarily drifts lower and then strengthens when demand returns in the fall. Market watchers are forecasting a similar pattern this year but are divided on how to prosper from the seasonal fluctuation.
“Any significant price weakness in gold equities over the coming weeks should be viewed as a buying opportunity, as we believe that gold bullion will likely move higher this fall,” said Canaccord Capital metals analyst Brian Christie in a note to clients.
Placer Dome (NYSE: PDG) is Canaccord’s top senior pick while Iamgold (TSE: T.IMG) is the brokerage house’s premier mid-level pick. Miramar Mining (TSE: T.MAE) is Canaccord’s top junior play.
Summer and fall oscillations are essentially caused by demand for the precious metal. Jewelry accounts for about 85% of gold demand and Italy is the heart of the fabrication market. Italian manufacturers shut down for all of August for vacation and come back in September. Then the jewelry makers aggressively build for the Christmas season, which is the biggest time of the year for gold.
Accordingly, Christie said he anticipates gold stocks will "drift lower" during the next eight weeks for seasonal reasons but could fall further if a Bank of England auction Wednesday indicates low demand for gold.
The Bank of England plans to sell about 20 metric tons of gold tomorrow during its second of six auctions that began in May. During the last auction May 15, bidders applied for 2.4 million ounces of gold at $268 an ounce, which equals an over-subscription rate of 3.7 times.
In advance of Wednesday's auction, the CBOE Gold Index is up 0.39% to 38.65. The Philadelphia Gold and Silver Index is 0.6% to 52.17.
“We expect a neutral to mildly disappointing result from the auction,” said Christie.
CS First Boston analyst Robert Doyle is also predicting a neutral to substandard result from the sale. He said gold stocks, though, don’t necessarily move in unison with the price of the gold.
“Traditionally there is a strong correlation between changes in the price of gold and changes in the price of gold stocks,” he said. “But we’ve seen a number of episodes earlier this year where gold equities outperformed bullion by a large margin. It probably had more to do with weakness in the technology sector and people looking for a safe harbor.”
The bottom line for Doyle is he’s telling CS First Boston clients to underweight their portfolio with gold equities right now.
“I’d be a little cautious about buying gold stocks. I think gold may have found a bottom near this level. But having said that, I don’t know if the gold equities will respond until we get a solid upward movement in gold as opposed to finding a bottom. It’s not the same as the tech sector where people are willing to come back in when a bottom has been reached.”
Doyle said aside from the demand from Italy, a catalyst may be right around the corner that will spark the entire sector. He just doesn’t know what that could be.
“The catalyst that always drives gold crazy is the one we can’t predict. It’s an event somewhere around the world we don’t expect. So do I expect the unexpected? Always. But I don’t know what it is.”
If the price of gold rallies, Doyle said gold producing companies with higher costs and leveraged balance sheets will "always benefit more from changes in the prices of gold" than the senior well-hedged companies.
Smaller equities that fit Doyle’s description of stocks that could benefit from a run in gold prices include Echo Bay Mines (TSE: T.ECO), Kinross Gold (TSE: T.K) Cambior (TSE: T.CBJ) and TVX Gold (TSE: T.TDX).
|
