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November 21, 2013 11:59 am
Can you be a gold bear, but a gold-stock bull? Gold dropped to a four-month low after the minutes of the Federal Reserve’s last meeting recorded a lot of talk about tapering. Gold stocks, led by Australia’s gold miners, followed suit. That pushed many miners’ prices, relative to their book values, back towards the multiyear lows seen in June when the metal first plunged on taper talk. Six months after that word really entered the market lexicon, the Fed’s latest musings contain the nuggets of a bull case.
Gold, the metal, is on course for its first full-year loss since 2000, with prices off a quarter this year. Gold miners’ stocks have done much worse – nearly halving, according to the S&P/TSX global gold index. The stock market weakness is hardly a surprise: heavy writedowns have dulled profits where they have not wiped them out entirely, and raised gearing ratios. Miners’ updates are full of talk about cost-cutting, and curbing more expensive production. But after 12 years of rising prices, attention on costs is no bad thing.
Gold is an emotional investment, from the buyers who fear inflation to those who are seeking a haven from some disaster. Throw in the end of a 12-year bull run whose later stages were characterised by haven-seekers fleeing the financial crisis, and calm thinking is hard to find. Enter the Fed. That it is still keen to begin slowing the flow of easy money was enough to spook investors. But the detail of the minutes looked at how the central bank could find offsets to limit market volatility. Gold prices should not soar in this scenario, but if global markets believe the Fed will do its best to make its exit as pain-free as possible, calmer markets can produce a steadier gold price.
This year’s sell-off has left gold miners’ under valuation, relative to global equities, at its most extreme since 2000, according to East Spring Investments. Australian miners, for example, are trading at about 70 per cent of book value even after hefty writedowns. For those with faith in the Fed, this is not the worst time to do a little prospecting.
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