Gold shines through gloom

IT WAS a nightmare day for most of 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 most of 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 hover 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 gold miner 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 and 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 he 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 mark," he said.

But 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: it 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.

The performance of the gold stocks yesterday was at odds with the rest of the mining sector, with BHP Billiton falling by 98? to $30.75 while Rio Tinto suffered an even bigger slump, losing $2.63 to close at $52.90.

BHP's fall below $31 saw a derivative offered by Citigroup terminated, while iron ore stocks Fortescue Metals Group and Atlas Iron shed almost 5 per cent and 6 per cent respectively.

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Frequently Asked Questions about this Article…

Why did Australian gold stocks outperform the broader market on that day?

The article says gold acted as a safe-haven: the US dollar gold price rose close to 4% over six days to about US$1,620/oz, while the Australian dollar weakened by more than 2% versus the US dollar. That combination lifted the gold price in Australian-dollar terms and pushed many local gold producers' share prices higher even as the wider market fell.

How much did the gold price and the Australian-dollar gold price move?

According to the article, the gold price rose to around US$1,620 an ounce (up close to 4% over six days). With the Australian dollar falling by more than 2% against the US dollar, the gold price in Australian-dollar terms rose from about A$1,544/oz to roughly A$1,675/oz.

Which Australian gold miners saw the biggest share gains, and what happened to Newcrest Mining?

Smaller Australian gold producers posted strong moves: Kingsgate Consolidated rose almost 4%, Evolution Mining more than 5%, Integra Mining more than 6%, Perseus Mining over 7% and Unity Mining over 8%. The article notes Newcrest Mining ended a recent weak run and its shares rose to A$24.53.

What did analysts and market commentators say about the rally in gold stocks?

Mike Harrowell from BBY described the rising gold price combined with a weaker Australian dollar as a "double whammy" for gold stocks and said margins for gold producers could get fatter over the next three months; he added he "wouldn't be surprised to see gold test the $US2000 mark." By contrast, analysts at Goldman Sachs were unimpressed with Newcrest's modest gain, calling it a "poor effort" compared with 6–7% gains by big global miners like Newmont and Barrick on foreign markets.

How did the Reserve Bank of Australia (RBA) frame the impact of currency moves on commodity prices?

The article cites the RBA's monthly report noting that the commodity price index improved by 0.9% during May in Australian-dollar terms despite falling by 1.9% on face value, highlighting how a weaker Australian dollar can boost local-currency commodity and resource returns.

Did other big miners follow the gold-stock rally?

No. The article points out a divergence: major miners fell—BHP Billiton closed at A$30.75 after a significant drop and Rio Tinto fell A$2.63 to A$52.90. Iron-ore names such as Fortescue Metals Group and Atlas Iron also shed almost 5% and 6% respectively. A fall in BHP below around A$31 even triggered the termination of a derivative offered by Citigroup.

What short-term implications for gold-producer margins did the article highlight?

The article reports commentators expect margins for gold producers to improve in the near term because a rising US dollar gold price combined with a weaker Australian dollar lifts local-currency revenues — potentially making gold production more profitable over the next few months.

What should everyday investors take away from this market move in gold and mining stocks?

Based on the article, investors should note that gold can act as a safe-haven and that currency moves materially affect Australian-dollar returns for local miners. The move also showed sector divergence: gold stocks can rally while other miners fall. The article reflects mixed analyst views, so monitoring gold prices, the Australian dollar and company-specific factors is important when assessing exposure to gold stocks.