Why gold stocks don't always glisten
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Christine St Anne is Morningstar's online editor.
Gold stocks may not always glisten with a price hike when the value of the commodity goes up. In fact, research from Morningstar has found a distinct non-correlation between the price of gold stocks and the price of gold.
Figure 1 shows the difference between the share price of gold companies in the S&P/ASX All Ord Gold and the price of gold. In fact, the share price of gold companies and gold began to diverge back in late 2011.
Figure 1: Gold price vs gold stocks (2005 = 100)
"Gold stocks have not got the leverage that you would have expected. Earnings have not come through because costs have been rising faster than the gold price. As a result, there has been no expansion of earnings that investors would have liked," Morningstar senior resources analyst Mathew Hodge says.
Yet many investors have traditionally looked to gold companies as a way to ride a gold rush.
Investors need to understand that gold companies are equities and not the commodity itself, a point highlighted by Cerro Resources (CJO) general manager of investor relations Greg Germon.
"Gold stocks are equities before they are gold. These companies just happen to be making money from gold," Germon says. Therefore, their share prices are a reflection of market perceptions of their current and future earnings.
For example, the stock price of gold company Regis Resources (RRL) rose on the back of increased production and self-funded growth.
In comparison, gold giant Newcrest Mining's (NCM) shares dipped because of concerns about cash-flow stability and production issues.
"It is important that investors understand the earnings of a gold company as the price reflects the earnings outlook, not just the gold price. The price movements of the equity markets determine the price of gold stocks more than the gold price," Germon says.