Markets: The fake gold premium

Citigroup’s Daniel Seeney says the share price and earnings of gold miners are more volatile than previously thought – highlighting the myth of gold's resolve.

Australian gold stocks are trading at prices that suggest a period of prolonged weakness in the price of bullion and an adverse outcome for miners with high cost operations, says Citigroup analyst Daniel Seeney.

Since April 1 the spot price of gold has fallen 22 per cent to $US1254.48 as of 1529 AEST. The shares of Newcrest Mining, the biggest Australian gold miner, have slumped 45 per cent during the same period. Regis Resources has slid 16 per cent. OceanaGold has fallen 47 per cent. Beadell Resources has dropped 36 per cent.

Gold miners’ “strategic plans are undergoing rapid change and the sector will likely face reserve downgrades and impairment charges across the board”, writes Seeney in a research report. “It is difficult to have confidence against such a backdrop”.

The Citigroup analyst says the plunge in bullion shares has punctured the myth that gold is less risky or more desirable than other commodities.

“Gold miners have been valued, and traded at, a premium to other miners for reasons only logical to ‘bugs’ yet generally accepted by investment markets,” says Seeney. “In our view there is no sensible rationale supporting this paradigm. It should be relegated to the dustbins of accepted practice in our view.”

Historical analysis shows that while the gold price has been less volatile than other commodities, the volatility of the share prices and earnings of gold miners has been higher compared to a diversified peer group of mining stocks, according to the Citi analyst.

Still, if the gold price recovers Seeney is recommending investors buy the stock of Beadell Resources and OceanaGold.