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Gold, silver stocks take heavy punishment as investors switch to base metals

The past 10 days has witnessed significant switching from miners of gold, silver and platinum into specialised miners of copper, zinc, tin and nickel.

Author: Barry Sergeant
Posted: Monday , 06 Apr 2009

JOHANNESBURG -

Over the past 10 trading days, patterns among global portfolio flows show that investors have withdrawn significant funds from listed precious metals stocks, and switched into virtually every other resources subsector. This includes diamond miners, which represent the most heavily damaged area.

Looking broadly in terms of the extent of stock price recoveries, the most favoured areas include specialist miners of copper, zinc, tin and nickel. Again, just as investors have switched out of listed precious metals stocks over the past 10 days, so too the prices of gold and silver exchange traded funds (ETFs) have been falling. Dollar gold bullion has traded down to multi month lows.

The switches out of precious metals areas have apparently been motivated mainly by accumulating evidence that the global "recession" is over; as the Bank Credit Analyst puts it, "with more evidence of a bottoming in global growth, investor attention has shifted to the strength of the recovery". The US leading economic indicator and a few of BCA Research's global leading indicators appear to have bottomed; indeed, even some global coincident economic data have bounced off of their respective lows.

In the U.S., the ISM new orders index rose above 40 for the first time in seven months, although this has not fed through to production as firms struggle to get inventories under control. The S&P 500 celebrated the shift in tone in the economic data, posting a solid 8.5% gain in March (its best monthly performance since an 8.6% gain in October 2002). The MSCI world equities USD index, a broad measure of global stock market behaviour, has bounced by 25% from it low points, seen during the latter parts of 2008.

An increase in risk appetite among investors has dampened the price outlook for gold, and silver; platinum group metals (PGMs), where demand is more linked to industrial activity have recovered firmly from lows, but not to the point where investors are flocking into PGM miners. The analysis of global mining portfolio flows shows that listed silver stocks, led by Fresnillo, continue to score first on composite stock price behaviour over the past 12 months, followed by listed gold stocks, led by Tier II names such as Iamgold, Eldorado, and Centerra.

Measured from stock price lows, typically seen among mining stocks during October and November 2008, listed copper stocks have now delivered the best "bounce", among substantial global equity subsectors, amounting to 138% on a weighted average basis. Looking at smaller groupings, Tier II gold stocks have in fact done better, as have primary silver miners, where the investible market value is just under USD 13bn. Gold stocks overall, where the global investible market value is just around USD 208bn, have bounced by 124% on average, substantially down on the 188% seen ten days ago.

Stellar stock price performances in the copper and related areas have been delivered by Tier II names such as Chariot, Northern Dynasty, Monterrico, Pan Australian, Augusta Resources, Imperial Metals and Centenario; among the established producers, African copper-gold miner First Quantum stands out, with a bounce of more than 200% from recent stock price lows.

Dollar prices for industrial metals have bounced sharply from troughs. Copper collapsed from USD 4.08/lb in mid-2008 to USD 1.28/lb in December. The price almost broke through the USD 2.00/lb level on Monday before profit-taking took hold. Global portfolio flows have also been flowing significantly into miners of zinc, tin and nickel over the past while. Among zinc names, stock price recoveries have been led by Sichuan Hongda, Shenzhen Zhongjin, Huludao Zinc, and Yunnan Chihong; in tin,Yunnan Tin leads the way, and in nickel, Jien Nickel, Independence Group, Minara Resources, and Mirabela Nickel, among others, stand out.

BCA Research states that the global focus has shifted to whether or not positive second-half growth will provide the base for a solid recovery next year: "there is plenty of fiscal and monetary stimulus in the pipeline, but the headwinds and risks highlight that the recovery will be fragile. Much will depend on the apparent success or failure of the bank stress tests and the US Treasury's plan to relieve banks of their legacy assets.

"Both are wild cards that could reverse the recent improvement in investor sentiment. Moreover, consumer fundamentals remain grim due to high debt levels, falling home prices and massive payroll cuts. Bottom line: A bottoming in growth suggests that we have seen the lows in the equity market, but a sustainable uptrend may take time to develop and could be very choppy".