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Save valuing gold in the ground at $500+ an ounce – a valuation technique that is akin to FX speculation - gold stocks remain one of the most expensive collections of stocks in the markets today.
On December 1, 2003 the price of gold fixed above $400 an ounce for the first time since March 1996. Given that the price of gold has only briefly traded below $400 an ounce since Dec 2003 and is trading around $440 an ounce today, you would think that owning gold stocks over the last 15-months has been profitable. This has not been the case. Rather, from Dec 1, 03 to Mar 11, 05 many top gold producers (NEM, GG, KCG) have actually declined in share price, and the two most popular gold stock indices – the XAU and HUI – have been unable to match their early Dec 2003 peaks.
Why has the XAU index fallen 10.1% since Dec 1, 2003 while the price of gold has strengthened by 10.9%? Lending little consideration to conspiracy theories – some bugs believe that the ‘evil’ COT commercial shorts also manipulate gold stock prices – the slump in gold stocks has been a result of the stocks getting ahead of the fundamentals. To be sure, after more than 1-year of $400+ an ounce gold most producers have been unable to produce strong enough financial results to merit respectable stock valuations.
Gold Jump Potentially Bad News for COT Configurations
Last Friday the price of gold hit new 2005 highs after a larger than expected current account deficit number negatively impacted U.S. dollar sentiment. To reiterate what was said on February 22, ‘when the below chart is updated later this week it will probably show a sharp increase in net commercial short interest’
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Buying/accumulating gold as the commercials are methodically taking a greater short stake in the gold market has not been wisest action since the gold bull began.
Gold’s Elusive Breakout
As I have speculated many times before, new lows in the U.S. dollar are required before gold breaks to new highs. What can be added to this speculation is that new highs in the price of gold are required before the XAU and HUI break to new highs. In other words, the recent range bound movements in the price of gold are largely irrelevant as far as gold stocks are concerned: until the price of gold sees new highs it is unlikely that the excitement that took the XAU to 112 in December 2003 will not be rekindled anytime soon.
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