PM sector comments from Briefing.com
(on NASDAQ.com web site)
<Sector Rating Commentary Precious Metals
Reviewed Feb 7 Slightly Outperform
In little less than two weeks, the Gold & Silver index, or XAU, has rallied an eye-opening 21%. With
the spot metal breaking above $300 an ounce for the first time in two years, gold bugs have come out
of the woodwork and are predicting spot prices of $355 to as much as $1000 an ounce (in the years
to come). Are they to be believed? Is this the beginning of the long-awaited bull run in gold? Or is it
just another news-related bubble that gets pricked quickly by central bank selling and a strong
dollar? In order to answer these questions a little history is in order. Current hype aside, the reality
is that gold has risen in only four of the past ten years, and is still about 20% below where it began
trading a decade ago. Though last year was one of the good years, it's important to remember that a)
the metal was bouncing off a near 20-year low b) the global economy was in recession c) worldwide
equity markets were in full retreat and d) the terrorist attacks on the US created a climate of political
and economic instability. Considering that most of these concerns continue to hang over the
financial markets (to some degree), it's not surprising that gold remains well bid. What has been
surprising is the pace of the advance. But that can be attributed in large part to the Enron scandal,
and the doubts it has raised about the credibility of corporate finances and of Wall Street. Other
factors contributing to the metal's recent rise include: Argentina's financial woes, central bank buying
(largely China), a spike in Japanese buying ahead of a change in government guarantees on bank
deposits, and a trend toward less producer hedging. With regard to the last issue, two of the largest
gold producers -- AngloGold and Newmont Mining (which recently merged with Canada's
Franco-Nevada Mining and is about to complete merger with Australia's Normandy Mining) confirmed
that they would be sharply reducing or eliminating hedging altogether.
Clearly, there's an impressive array of forces underpinning the current advance in gold prices. Though
Briefing.com expects the domestic economy to gain momentum as the year unfolds, there's enough
uncertainty regarding the strength of any such recovery to suggest that gold will remain in favor as a
hedge against prolonged sluggishness. Meanwhile, the other main forces which had been weighing
on gold over the past few years -- central bank selling and the strong dollar -- appear less relevant.
The market has adjusted to the more predictable selling by central banks and though the dollar
remains strong against most global currencies, virtually all major currencies have lost value relative to
gold -- a signal that many investors are losing confidence in the monetary policies of the developed
nations.
Given how quickly gold spiked, don't be surprised to see the metal lose some of its glitter over the
very short-term... However, as long as support in the $278 area holds on any correction, Briefing.com
expects gold to make another run at the 310 area, with penetration setting up an intermediate-term
test of the $335-$350 area. And with spot prices on the rise, gold stocks should continue to shine -
though historically rich valuations levels will limit scope of additional upticks.
We are reiterating our 4-star rating.
Stocks: Agnico-Eagle Mines (AEM), AngloGold (AU), Barrick Gold (ABX), Gold Corp. (GG), Gold
Fields (GOLD), Hecla Mining Co. (HL), Newmont Mining (NEM), Pan-American silver (PAAS), Placer
Dome (PDG).>
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