How high will the gold price go?
With the precious metal hitting record highs this week above US$1620 an ounce, gold bulls are inevitably talking about spot prices of US$1800 and US$2000. But a more important question is, why are Australian gold stocks lagging the gold price rally and is it a buying opportunity?
Even after gaining 8.2 per cent so far this month, the S&P/ASX All Ordinaries Gold Index, which covers 47 Australian Securities Exchange (ASX)-listed gold companies, is down 3 per cent year-to-date, continuing a weaker-than-expected correlation between the US-dollar gold price and local gold stocks in recent years.
The gold price has rallied sharply as markets fret about the debt ceiling stand-off in the United States and the potential for credit ratings agencies to downgrade the country's rating and send shockwaves through global financial markets.
Money is pouring into gold. ETF Securities' Danny Laidler says its global physical-backed gold exchange-traded commodity had more than $230 million in fund inflows last week, and more than $400 million this month. That is the strongest inflow since August 2010. ETF Securities' ASX-listed physical-gold exchange-traded fund received $24 million last week as local investors punted on a higher gold price.
ETF Securities said in a note: "The debt agreement by European government officials last week does not appear to have been enough to slow investor demand for gold and other 'hard assets' ... Across the Atlantic, S&P reiterated its threat to downgrade its US sovereign debt credit rating as the August 2 deadline to raise the US debt ceiling looms. S&P estimates there is a 50:50 chance that it will cut the US AAA government debt rating within three months."
This is news to the ears of gold bugs, who believe heightened risk aversion will see investors increasingly favour safe-haven assets, such as gold.
Tradeideas.com.au's Greg Tolpigin, a former hedge fund manager, believes the gold price is headed towards US$1700, before gains are limited for a few months. Tolpigin says: "Anything beyond US$1700 would need something catastrophic to come out of the US and Europe in the near term.
"I still expect the gold price will be well supported and head higher in the medium term. Eventually we will look at levels closer to US$2000 within the next two years, largely because sovereign debt issues in the US and Europe are not going away. Central banks worldwide are not going to know which currencies to invest in."
Another good judge of gold stocks, BGF Equities, believes gold will trade between US$1650 and US$1750 in the second half of 2011.
BGF argues the disconnect between gold bullion and gold equities offers "a significant opportunity to purchase quality gold companies at discounted prices, with the continuation of the bull market in bullion being the catalyst for the catch-up when gold equity markets recover". It says the outlook for gold remains "overwhelmingly positive".
The main problem for local gold stocks is sentiment. With global equity markets under pressure, many gold stocks are struggling to break higher.
The market may not yet believe a higher gold price is sustainable, with analysts still using lower gold prices in their earnings forecasts. And further gains in the Australian dollar, which has dampened the Australian-dollar gold price in recent years, might also weigh on gold stocks. Rising gold prices may also hinder profits for some gold companies.
Tolpigin says Australian gold stocks historically lag gold price rises.
"Investors expect a higher gold price should automatically be accompanied by higher gold stocks. But if you look at history, it's not until the gold price and equity markets stabilise, that gold stocks tend to improve. We may see that later this year when equity markets calm down," he says.
