Gold Investing News

 By Dave Brown - Exclusive to Gold Investing News

The old trader’s maxim - First Move, Wrong Move - is often used to describe the absolute despair and euphoria which tend to coexist in the world of behavioral finance, manifesting themselves in market activity. 

The observations of last week-end and the start of this week suggest that perhaps this mania was at work and now investors might be looking around at the current environment and deciding what the changes to the financial landscape on Wall Street will mean for the real business cycle on Main Street. 

 Following Friday’s colossal collapse of the Dow Jones Industrial index and subsequent rebound on Monday, Tuesday’s session gave back some of the gains, closing down 0.82 per cent.  The spot price of gold closed at US$842.60 per troy ounce.

On Tuesday, the Bank of Japan joined European counterparts to offer lenders needed liquidity in a combined joint attempt to lower borrowing costs in money markets and loosen credit worldwide.  The statement issued by the central bank agreed to provide dollars at fixed interest rates for an “unlimited amount against pooled collateral.” The measure also includes plans to expand the range of Japanese government bonds it accepts from lenders, augment companies’ access to cash and delay a program of selling shares it bought from banks between 2002 and 2004.

Barnard Jacobs Mellet released a research report which suggests that gold mining companies are trading at very attractive valuations.  The commentary outlined several reasons which included the relative market appreciation with gold producers underperforming the precious metal by a massive 39 per cent this year, despite gold being up only 2 per cent since the end of 2007. The thesis that gold stocks can be viewed now as relatively attractive in the current market vs. both other sectors and the gold price itself, is underscored by bullish forecasts which will maintain strong revenues and begin to build in declining input costs - a formula resulting in resilient earnings. 

This year, companies have been handicapped by rising costs driven by unfavorable currency exchange rates, in addition to escalating oil and other input costs. These pressures are now fading into the backdrop, at least in the near term, therefore, a good opportunity for equities to outperform the metal may offer investors an extra opportunity to increase or gain exposure in this asset class.

A recession should lead to lower product prices and sales volumes for companies in most other sectors, and the gold price should continue to remain relatively durable as the US dollar weakens comparative to hard assets and as more investors switch into safe havens. With a continued reduction in official interest rates, and the high level of negative real interest rates, the international macro environment seems to guide towards gold price appreciation over the near to midterm.

The precious metals and minerals team at BMO Capital Markets issued a bullish outperform rating on the gold industry, implying attractive equity prices, and a positive outlook for the gold price in the near future.  The analysts have conducted analysis of senior and intermediate gold stocks utilizing a variety of metrics to replicate market preference for lower-risk growth stocks with superior cash flow. Companies were ranked using models of revenue growth, adjusted price to net present value, capital expenditures to market capitalization and the time required for net cash to equal market capitalization. Two of the companies which received favourable recommendations include Goldcorp Inc. (TSX: G) and Kinross Gold (TSX: K, NYSE:KGC).