Are Gold Equities Losing Their Sparkle? UBS Answers

While gold has traditionally been used as both a hedge against inflation and a reserve currency, it may be losing some of its luster due to the rising popularity of other metals.

As a result, gold equities have underperformed bullion by 13% in the past three months, according to UBS Investment Research, where gold producers are considered unlikely targets for private equity buyers.

The firm attributes this unpopularity to strong performances elsewhere in the mining sector, but also to the fact that investors may be concerned that gold equities no longer move counter to the market.

“Gold typically has shown a positive correlation to the oil price, a negative correlation to the U.S. dollar and, most importantly, a negative correlation to U.S. equity prices,” UBS told clients in a note, adding that these relationships have eroded.

With gold essentially ignoring weakness for the greenback and rebounding oil prices in 2007, it may no longer be a reliable portfolio hedge for generalist investors during bear markets.

UBS points out that China may be reluctant to save the gold market and buy bullion from the European Central Bank if it loses its inverse correlation to the U.S. dollar.

Meanwhile, the only gold stock that outperformed bullion during the past three months was Golden Star Resources Ltd. (GSS), a situation UBS attributes to the investment flow captured by the gold ETF, strong performance for other base metal equities and less traditional ones like molybdenum, as well as fewer gold discoveries.

Perhaps that’s why Barrick Gold Corp. (ABX) chairman Peter Munk raised the possibility that his company may one day expand into other precious or base metals.

Regardless, UBS analysts continue to like names like Kinross Gold Corp. (KGC), Agnico-Eagle Mines Ltd. (AEM) and Goldcorp Inc. (GG) among North American gold producers, but they note that the real test for these and other gold stocks will only come if during the next equity bear market or if gold spikes higher.

Comments

[omooc:]

Jim Cramer seems to like only AUY. This post provides some answers to the sudden surge in GG today (5/31), more so than the increase in AUY. Thanks for the post. omooc

2007 May 31 11:22 PM