Storm in a gold teacup

For just over a month, gold stocks around the world have been savaged, leaving gold bugs scrambling for the skirting boards.

JOHANNESBURG -

The dollar gold bullion price has retraced by around 14% since it traded at nominal records around $1,030/oz just over a month ago. Over the period, investors across the world have savaged gold stocks just as the carnival appeared to be warming up. High flying names have been battered, day after day. Kinross (KGC US, $19.84 a share), for months a leader in the Tier I global grouping, has lost more than a quarter of its value in just a few weeks.

A broader survey of resources stocks indicates powerful portfolio switches from certain sub-sectors, including gold, into iron ore stocks, along with coal stocks, and also, once again, oil stocks, which do not fall strictly under the umbrella of the mining classification. With the exception of a few highly selected stocks here and there, platinum stocks are also out of favour, despite constant yelling that the platinum metal price is certain to continue into orbit. But then, copper stocks are also underperforming, despite a metal price that bounces along within a breath of record levels. Silver stocks have also gone out of fashion.

Just what kind of a storm was it that hit the gold stocks carnival? Make no mistake about it, a good number of gold stocks have posted meteoric increases; in the past year or so, returns of more than 100% have been shown by names such as Kinross, Centerra (CG US, C$9.19), Randgold Resources (GOLD US, $49.24), and Shandong (600547 CH, CNY 131.76).

There appear to have been two key issues at play. Since at least the onset of the dollar's latest - and protracted and ongoing - bear market late in 2001, gold bullion has shown itself up to be primarily a global liquidity play. During each period since then, gold bullion prices have risen when global interest rates, but particularly US interest rates, have been reduced, boosting global liquidity.

The Federal Reserve, the US central bank, most recently crash-opened liquidity taps after the subprime mortgage bond crisis exploded during August 2007, when bullion was cruising along in the $650-$750/oz band. The renewed liquidity party sent investors rushing into precious metals all over again, led by speculators who, it now seems pretty clear, aggressively discounted, and then over-discounted, the quantum of liquidity generation ultimately required. For the past month or so, each sign that the global credit markets threat is increasingly reigned-in sees precious metals prices bleed.

As noted, the other big issue increasingly emerging in global resources markets is the ongoing switch to stocks involved in supplying raw materials, where demand is largely inelastic: iron ore and related materials, and oil and coal. By contrast, when precious metals prices simply continue rising, consumers become increasingly resistant. In the case of gold, where India rates as one of the biggest buyers of fresh metal, elasticity is playing out with a vengeance as consumers increasingly pay a lot more for energy and, more recently, a lot more for food.

Investors are playing the trends with increasing determination. Listed stocks representing plays in iron ore and coal are suddenly no longer the ugly ducklings of yesteryear. With the ongoing realization that miners of bulk commodities hold big selling power, and can leverage this into serious cash flows, the tide continues turning.

Vale (RIO US, $37.74), now the world's No 2 mining stock, rated by market value, has registered an increase of around 1,000% in its stock price over the past five years, compared to, say, the 200% or so registered by each of two longstanding gold names, Kinross and Barrick (ABX US, $39.08), the world's No 1 gold stock by value and output. Gold simply ain't what it used to be.