June 25, 2003 |
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As traders ready to pour over today’s FOMC Statement and draw inane speculations about what the ¼ or ½ point rate cut really means, there is only one conclusion that can be made beforehand: at 2:15:01 PM today the financial markets are going to embark upon a violent few minutes of trading. Using the above charts as a guide, the case could be made that gold stocks are just as susceptible to a stock market correction as normal stocks. To be sure, since a significant run-up in gold shares in early 2002 – a run-up wherein gold shares bucked the trend in the markets and the Wish List removed its last holding (MDG) – gold stocks have been mirroring the trend in the S&P 500. In fact, since mid-2002 the most opportune time to own gold shares was not before the price of gold rallied strongly, but before the stock markets rallied strongly (or when the broader stock markets hit their ‘bottoms’). Conclusions Gold stocks followed the metal lower yesterday, and if the price of gold continues to correct there is little doubt that gold stocks will decline. Incidentally, and although it may be too early to speculate, one has to wonder whether or not a period of calm in the financial markets – in particular a period of calm in the dollar – could rattle gold back down to the $320 an ounce area. This is something to keep in mind today, as at 2:15:01 the violent action in the financial markets could have immediate implications on the trend in gold. That said, rather than focus on the price of gold to concoct speculations about gold stocks, it may be just as important to consider the price of the stock markets in general. Quite frankly, I wouldn’t bet that the trend between gold stocks and the markets is about to end. Rather, I would speculate that if the U.S. stock markets are entering a correction phase leading into August/September that gold stock will also correct irregardless of what the POG does (the sole caveat being that if the stock market correction turns into a full fledged panic and/or the dollar collapses that gold stocks would likely follow the POG higher). A company like Agnico-Eagle, which has long operational history and is currently encountering some production/cost setbacks, may be the type of gold stock to monitor if the correction in stocks continues. Unlike investor favorites like Newmont, Agnico could potentially buck any downtrend in the markets (or the POG) if the company can remedy their operational setbacks. However, and much like speculations for $320 an ounce gold, it may be too early to be excited about owning the Agnicos’. The stock markets are still pricing in a terrific second half turnaround, gold stocks are still pricing in a higher POG, and today’s Fed decision may not immediately change this picture. In sum, for the sidelined investor attracted to the long-term advantages of being exposed to gold via equities, one question arises: will gold shares follow the markets lower again?
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