Easing dollar and rising gold a double whammy for stocks

IT WAS a nightmare day for the market, but for Australia's gold producers the news was doubly sweet.

By InvestSMART · 5 Jun 2012

By InvestSMART ·
5 Jun 2012

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IT WAS a nightmare day for the market, but for Australia's gold producers the news was doubly sweet.

Not only did gold prices continue their rise on the back of economic jitters, but a softening in the Australian dollar amplified the warm glow for local producers, pushing a number of share prices strongly higher.

In keeping with its safe-haven status in times of trouble, the gold price rose close to 4 per cent over the past six days to be hovering around $US1620 an ounce last night.

Over the same period the Australian dollar has fallen by more than 2? against the US dollar, meaning the gold price in Australian terms has risen from about $1544 an ounce to $1675 an ounce last night.

That combination of factors was enough to end Newcrest Mining's recent horror run, pushing shares in Australia's largest listed goldminer up by 42? to $24.53.

Smaller gold producers enjoyed much bigger gains, with Kingsgate Consolidated rising by almost 4 per cent, Evolution Mining rising by more than 5 per cent, Integra Mining more than 6 per cent, Perseus Mining by more than 7 per cent while Unity Mining by more than 8 per cent.

Mike Harrowell from BBY described the combination of the rising gold price and easing Australian dollar as a "double whammy" for those stocks and predicted margins in the gold production business could get even fatter over the next three months.

"We wouldn't be surprised to see gold test the $US2000 ($2063) mark," he said.

Despite the gains by Newcrest, analysts at Goldman Sachs were unimpressed, describing the 1.74 per cent gain as a "poor effort" compared with the 6 per cent and 7 per cent gains made by big goldminers such as Newmont and Barrick on foreign markets on Friday night.

The impact of the weakening currency on local miners was highlighted by the Reserve Bank in its recent monthly report on commodity prices: the Reserve noted the commodity price index improved by 0.9 per cent during May on Australian dollar terms, despite falling by 1.9 per cent on face value.

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Frequently Asked Questions about this Article…

How did the easing Australian dollar and rising gold price affect Australian gold miners?

According to the article, the combination of a weaker Australian dollar and a rising gold price acted as a “double whammy” for local gold producers, amplifying their revenue in Australian-dollar terms and pushing many share prices higher. The article quotes Mike Harrowell saying margins in the gold production business could get even fatter over the next three months as a result.

By how much did gold rise recently, and what were the USD and AUD price moves?

The article reports gold rose close to 4% over the past six days to hover around US$1,620 an ounce. Over the same period the Australian dollar fell by more than 2% versus the US dollar, lifting the gold price in Australian-dollar terms from about A$1,544 an ounce to roughly A$1,675 an ounce.

Which Australian gold companies saw share gains after the gold price and currency moves?

The article highlights several Australian gold producers that enjoyed gains: Newcrest Mining (shares rose to about A$24.53), Kingsgate Consolidated (almost 4% higher), Evolution Mining (more than 5%), Integra Mining (more than 6%), Perseus Mining (more than 7%) and Unity Mining (more than 8%).

What did analysts at Goldman Sachs say about Newcrest’s recent share rise?

The article says analysts at Goldman Sachs were unimpressed, describing Newcrest’s 1.74% gain as a “poor effort” compared with the roughly 6% and 7% gains posted by big gold miners such as Newmont and Barrick on foreign markets.

What does the term “double whammy” mean for gold stocks in this context?

In the article’s context, “double whammy” refers to two reinforcing effects that boost local gold producers: a rising global gold price and a weakening Australian dollar. Together they increase the Australian-dollar returns for miners and can widen profit margins, according to Mike Harrowell of BBY.

Could gold reach US$2,000 an ounce, as mentioned in the article?

The article quotes Mike Harrowell saying, “We wouldn’t be surprised to see gold test the US$2,000 (A$2,063) mark.” That reflects an analyst view reported in the piece, not a guarantee.

What did the Reserve Bank note about commodity prices and the currency effect?

The article cites the Reserve Bank’s monthly report, which noted that the commodity price index improved by 0.9% during May on Australian-dollar terms, even though it fell by 1.9% on face value. This highlights how a weaker currency can make commodity prices look stronger in local terms.

What are the main takeaways for everyday investors from this article about gold and the Australian dollar?

The article’s main takeaways for everyday investors are: a rising gold price and a weaker Australian dollar can materially boost Australian gold producers’ local revenue and share prices; smaller producers in the article saw larger percentage gains; analysts’ views differ (some were unimpressed with certain moves); and central-bank commentary shows currency shifts can change commodity-price readings in local terms. The article reports these developments as market observations rather than investment advice.