The price of gold popped up from support at US$1180 in October last year when stock prices began to decline.
It broke out above resistance at US$1240 in December when stocks sold off again.
During the recovery in stocks since Christmas, gold prices have gone even higher.
This raises questions about the link between price movements in gold versus stocks in October and December. Was gold truly acting as a safe haven amid volatility elsewhere? Is gold now attracting support due to fears of future volatility?
There’s no simple answer to recent events.
But the link between gold prices and stocks doesn’t really stand the test of time. There are long periods when both of these sectors travel in the same direction and long periods when they move in opposite directions.
In the early years of the century before the GFC, gold and stock prices both increased measurably. During the GFC itself, stocks were hammered by 50% or more and gold prices fell by more than 30%.
Stocks rallied from 2009, but suffered deep corrections in 2010 and 2011. Gold prices bottomed out in 2008 and more than doubled without a substantial correction until the high in 2011.
Since then, stocks rallied after 2011, but the gold price collapsed. A perceived link between movements in gold and stock prices looks rather tenuous. There may be a correlation in price movements over brief periods, but the link doesn’t hold up over the longer-term.
The charts appear to suggest that each investment class runs in its own series of cycles. Perhaps the best answer is to analyse each investment class in its own right. You can also keep an eye out for brief periods of correlation as a catalyst for a quick move.
The same is true of individual stocks.
Stocks in a similar sector can often move in the same direction. When the price of gold goes up, you’d expect most gold stocks to perform well.
Yet each stock represents a company with different leadership and a different style of management.
Let’s take a look at a few individual gold stocks.
Barrick Gold Corp [NYSE:GOLD] is the world’s largest gold miner in terms of its value and the amount of gold produced. It used to trade under the symbol ABX.
Following a merger with Randgold Resources, it began trading under the GOLD symbol on 2 January. Shareholders of both companies voted in favour of the US$18.3 billion merger in November. The deal gained final official approval in December.
Let’s bring up the weekly chart over the course of the decade:
Barrick continues to suffer from its activity in mergers and acquisitions in the early part of the decade when the gold price was much higher. This took a toll on its balance sheet and burdened it with heavy debt.
It’s a similar story for other NYSE-listed gold majors like Newmont Mining Corp [NYSE:NEM] and Goldcorp Inc [NYSE:GG]. We’ll stay away from these juggernauts until the charts show signs of growth.
Let’s take a look at a couple of Australian miners that made significant changes in direction.
The former YTC Resources Ltd listed in 2007 with a portfolio of tin and gold-copper projects. It took its name from a strategic alliance with China’s Yunnan Tin Group, the world’s largest producer of tin.
The company later made the move to concentrate on the Hera gold project and the Nymagee copper project in central New South Wales. The move away from its roots called for a name change. In June 2014, the company changed its name to Aurelia Metals Ltd [ASX:AMI].
Chief executive officer Jim Simpson had wanted to combine the assets of his Hera project with the nearby Peak gold mine for many years. Simpson was formerly the general manager of Peak Mines from 2004.
In November 2017, Aurelia announced a binding agreement with Canadian miner New Gold Inc to acquire Peak Mines for US$58 mln.
The company reported 2018 full-year earnings in August last year. After a significant increase in production from the Hera project and the addition of Peak, gold production more than doubled. Sales revenue grew by 127% to $249 mln and net profit increased by 413% to $99 mln.
The key driver of profits was more than a doubling of gold production at nearly half the cost.
Aurelia moved quickly to pay down debt. The purchase of Peak was completed in the June 2018 quarter and the cost of the acquisition was mostly repaid in the first quarter of ownership. The company now reports no debt and a net cash position of $108 mln as at 31 December, 2018.
Let’s bring up the weekly chart over the last five years:
Not all gold stocks move in the same direction
The share price began to take off after the announcement of the binding agreement to acquire the Peak mine. It’s now up nearly fourfold. Aurelia prides itself as a low-cost gold producer.
The recent move to 87 cents is above the prior record high of 81.5 cents set in 2011. But this stock is now a vastly different company compared to its former life when it was linked with a major Chinese tin producer.
Let’s take a brief look at one of the favourites among Australian gold stock investors.
Northern Star Resources Ltd [ASX:NST] prides itself as a low-cost gold producer with tier-1 world-class assets.
Here’s the daily chart over the last year:
At the recent high of $9.80, the share price had more than tripled from a significant low (not shown) in December 2016.
There was a sizeable gap down a couple of weeks ago.
The company announced an increase in costs. All-in sustaining costs for the 2019 full-year are now expected to be $1,125–$1,225 per ounce. This is up by 6.8% from prior guidance of $1,050–$1,150 per ounce.
Production of 210,561 ounces in the December quarter incurred all-in sustaining costs of $1,365 per ounce. This was markedly higher than $1,115 predicted by analysts.
The performance suffered from higher costs of $1,681 at the newly acquired Pogo mine in Alaska. Higher costs at Australian operations reflect the company’s decision to mine ore at lower grades. This strategic decision was taken due to higher gold prices.
Not all gold stocks move in the same direction.
The charts will often prompt you to take a look at what’s happening behind the scenes.
Chartist, Phil Anderson’s Time Trader
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