While the Gold Bug-o-land is waving again the flag of global market Schadenfreude and celebrating yet another record set by the gold prices in just about any currency except the Yen, a more discerning investor in gold securities must be scratching his head.
For most of us, the new-new world began at the beginning of this year, when 10-year yields in Germany, US and UK commenced to succumb to gravity. By March, real yields began to fall as well. And as the Mediterranean drama continued to cleave the sovereign bond universe into a distinctly two-tier market, the unthinkable happened. On April 12, Chinese authorities announced draconian measures to cool the giddy property market. Since then, the global mining index has collapsed by 18.5%.
The reaction of the gold stocks depended on the market. As the Japanese investors, spooked by the perspective of a Chinese slowdown, pulled out their capital from their favorite carry-lands – Australia and New Zealand, the currencies of these countries collapsed and by mid-May the Aussie began to even trail the embattled Euro. With deflation firmly set in Japan and gold struggling to outperform the Yen, East Asians turned away from bullion. The round-the-clock merry go round saw Europeans plough their savings into coins and small bars, then Americans slowly pushing up ETF holdings and then Asians selling gold into another intra-day rally. None of this helped the Australian gold stocks. Adding insult to injury, foreign investors were doubly punished on the translation from the the Australian dollar – the first real casualty of Beijing’s measures. As a result and despite gold’s stellar performance in AUD since April 12 (up 18%), Australian gold indices barely budged. Although much of this could be attributed to Mr Rudd’s mismanaged profit tax threats, the Hong Kong-listed gold miners fared even worse than Sydney’s. Caught up in the regional sell-off compounded by the unwinding of the short Euro/long Asia trades, the HK gold stocks, posted a measly return of negative 3.5%. Obviously, going forward, the value opportunities among Australian gold stocks are unprecedented – with the Aussie dollar prospectively flattering the margins of these companies in the near term.
Things looked better in the European time zone. Naturally, the panic surrounding the currency crisis pushed investors into London and Johannesburg-listed gold stocks. Especially the latter appeared attractive after the disastrous 1Q results. South African golds have returned nearly 9% since April 12. The Africa and Russia – focused London gold stocks have gained almost that much, despite higher valuations at the beginning of the period. And that was quite an achievement on the oil spill-infested FTSE.
This brings us to the Americas. Here, the obsession with the domestic themes has deepened further over the past two months. Not surprisingly, the ever higher prices of gold, as denominated in Euro, were of little relevance for the US and Canadian equity investors. And so, gold stocks have yet again underperformed physical gold. Gold has returned over 6% during this period, with the main gold equity indexes trailing by around 2-3%. Remarkably, GDXJ – the index including smaller miners and explorers is yet to recover from the dramatic 20% drop in mid-May and turn positive over the period.
Indeed, many explorers have suffered considerably during this period. We have compared several sub-indexes, categorized by themes which are easily comprehensible to non-specialist investors and general public. One such group of exploration companies is exclusively composed of companies with over 5moz resources (measured and indicated only). Another index is composed of companies focusing on high grade properties (at least 1.8 g/t). Finally, a separate index has been created to distinguish between companies audacious enough to plunge into countries of high perceived risk (e.g. Central African Republic, Ecuador or Romania) and those preferring to focus on geologically prospective terrain in low risk jurisdictions (North America, Mexico, Chile).
The period under consideration shows that the companies with big resources and low sovereign risk were the preferred picks despite the volatility which affected all exploration companies across the board. But companies with smaller resource base did not seem to be overly penalized by comparison. Instead, it is the “high grade” group of explorers which seems to have fallen out of fashion, underperforming even the “high country risk” group. It is often the case that companies in high risk areas pursue only attention-grabbing high grade (and low tonnage) projects which could be brought to production at a fairly speedy pace. The exoticism of the destinations does not help and the jumpy and largely directionless equity market seems to fear nothing less than another Bre-X, twelve years after that sad event.
Tags: AUD and gold, Australian golds, gold juniors, gold stocks, Hong Kong golds, London golds, South African golds