The Hindu Business Line : Global gold equity indices barely gain

WHILE tremendous investor confidence in gold is evident, currently, gold equities do not seem to enjoy such a privilege. In a rather unusual development in the world marketplace, where gold prices are surging to newer heights by the day, global gold equities, far from reflecting the robustness of the physical gold market, are actually under-performing the yellow metal.

Traditionally, investors with a positive view on the outlook for gold believe that higher gold prices would translate into higher profits for gold producers and, in turn, expect higher dividend on equities.

However, remarkably, although gold prices are at 16-year highs, global gold equity indices have barely gained. There is a large divergence today between gold prices and gold equities.

What can be inferred from the current development? According to Mr Kamal Naqvi, precious metals analyst with Barclays Capital, first, investors in the gold equities do not believe the current level of prices are likely to be sustained; and second, there is concern that gold companies may lose discipline in terms of corporate behaviour (takeover, share issuance and committing to increased production).

Another reason adduced by the expert is that many gold companies were unlikely to receive the full benefit of higher US dollar gold prices due to the appreciation of their currencies, such as Canadian dollar, Australian dollar and South African rand.

Gold prices have surged above $450 an ounce— rising to the lofty heights for the first time since June 21, 1988. The price performance is driven primarily by the continuing downtrend in the dollar.

Commenting further, the expert pointed out that the divergence between gold prices and gold equities could not have come at a better time for the promoters of StreetTRACKS Gold Share which listed last Thursday on the New York Stock Exchange, where one share is equivalent to one-tenth of an ounce of gold.

The shares have surged to an impressive market capitalisation of more than US$1.3 billion and 96.4 tonnes of gold in trust. These shares offer no leverage and dividend (indeed, there is a cost of 0.4 per cent per year), but they do offer a direct exposure to the gold price and, in the present environment, that is a very attractive feature.

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