All that glitters is not gold – and that applies as much to gold stocks as much as anything else.
The markets have not taken a shining to gold stocks over recent months, which has led to a disparity of pricing between them and the gold spot price.
Even though gold has dropped back, times of economic uncertainty always boost the value as investors look to switch their cash from poorly performing currencies in to a an asset that holds a better price while still offering liquidity.
After all, there’s more than a nugget of truth in the thought that, if the worst happens, you can always stick some gold in your pocket and go out and spend it.
Try doing the same with a pocket stuffed with drachma if Greece loses the protection of the eurozone.
So what’s the problem with gold stocks?
It all comes down to the cost of production. Claiming the precious metal from the bowels of the earth is not cheap. The markets feel any spot price dropping below US$1,500 an ounce makes retrieving gold too expensive for some mining companies, squeezing their margins and pushing them out of profitability.
The disparity is reflected in prices.
Gold is hovering around $1,640.50 per ounce, giving the miners some respite from the pressures of cutting costs or losing profits.
Last autumn, the markets were rising high with the spot price hitting $1,900 an ounce.
In a year, the FTSE Gold Mine Index has slipped 16%, while the spot price has stayed more or less static with an adjustment of 50 basis points.
The markets are hinting they expect to see some consolidation as the mining companies carrying higher costs start to fall to leaner and fitter firms with better systems and margins.
