Gold finally puts shine on TSX

For the first time in months, gold equities have more momentum than their underlying commodity.
While gold bullion has generated most of the attention this week as it reached uncharted levels, Canadian gold stocks registered even bigger gains, suggesting investors are starting to recognize the massive margins and cash flow mining companies can generate at these prices.
Among the big winners so far this week are Yamana Gold Inc. (up 15%), Barrick Gold Corp. (up 11%) and Eldorado Gold Corp. (up 14%).
They all jumped sharply Wednesday as the key gold futures contract topped US$1,800 an ounce for the first time. That performance helped the Toronto Stock Exchange end the day in positive territory.
The TSX’s gains came despite huge drops on U.S. stock exchanges.
Since the financial crisis in 2008, gold bullion has gone on a fantastic run while gold stocks have been a disappointment. Investors have worried about rising costs, political uncertainty and many other factors as they preferred bullion during turbulent times.
Sources said that the significant drop in oil prices over the last couple of weeks has brought new attention to the mining companies. Oil is a key input cost, and lower prices means bigger margins.
“What we’ve been seeing in the last little while is that input costs are contained — they’re not as bad as people think they are,” Yamana chief executive Peter Marrone said in an interview. “If there’s upside pressure, it’s more modest than the movement in the [gold] price.”
He added that investors are starting to accept gold prices at “sustainably higher” levels than what the equities have been pricing in.
Gold bullion, meanwhile, climbed as much as 3% on Wednesday as investors worried about the health of the French banking system, which is heavily exposed to eurozone sovereign debt.
That just adds to the global economic uncertainty for investors, who are driving gold to its biggest rally since 2008. The yellow metal has climbed roughly US$150 an ounce in the month of August alone, and has closed higher in nine of the last 10 trading sessions.
While analysts have noted that gold appears to be getting ahead of itself right now, it is also moving into a seasonally strong period, as demand usually rises in the fall around the Indian wedding season.
Analyst targets are rising and the skeptics are getting drowned out as the price keeps going up. On Wednesday, Stifel Nicolaus became the latest institution to project US$2,000 gold, a level that seemed highly unlikely a few years ago to anyone but the gold bugs.
“The recent turmoil in financial markets implies that worldwide [particularly in Europe and USA] real interest rates will remain negative, much more money will be printed, and competitive currency devaluation will continue,” analysts George Topping, Josh Wolfson and Dave Hove wrote in a note.
Traders will be watching over the next couple of days to see if gold meets resistance at the US$1,800 level. U.S. COMEX gold futures briefly topped $1,800, then settled at $1,784.30, up 2.4%.
Gold met very little resistance at US$1,600 and virtually none at US$1,700.
Source: National Post