A week in gold: Mining shares better geared to any price revival

Gold ended a tough week on a rising note as the US non-farm payrolls number slightly missed estimates while serious fighting in Ukraine again boosted safe haven demand.

Over the five days however the metal was still heading for a decline of more than US$40 having hit a four and half year low of under US$1140 mid-week.

One reason has been the strength of the dollar. Traditionally gold and the US currency move in opposite directions as gold and this has hit the metal hard in the past two weeks.

The dollar has soared but especially against both the yen and euro on more monetary stimulus measures being either enacted or proposed in Japan and Europe.

This had translated into renewed outflows from gold-backed exchange traded funds.

According to ANZ Bank the amount of gold held in physically-backed ETFs is one of the most closely-watched indicators of investor sentiment.

“The importance of this indicator as a barometer of investor sentiment cannot be overestimated” it said in a note this week.

Gold held in ETFs globally amount to more than half a year’s worth of primary (mine) supply.

Market sentiment for gold prices looks bearish on that score but holdings in gold miners paint a different picture suggests the broker adding that investors now find better value in gold miners than they do in gold. 

One reason for this is that gold stocks as a whole have fallen by significantly more than the gold price since 2011.

As a result the correlation of gold mining shares to the price the beta at 2 is the highest it has been for years suggesting mining stocks should outperform on a rebound in gold prices.

Investor flows into ETFs backed by gold miners supports this theory adds ANZ despite the continued liquidation in physical gold funds. 

A key demand driver of gold ETFs was the desire for exposure to the rising price of gold without investing in the miners due their huge forward selling of gold. Now gold producers no longer hedge forward en-masse says ANZ.

Indeed over the past decade the net physical impact of producer de-hedging has actually been supportive of the gold price as producers bought back short positions and were actually a source of physical gold demand not supply.

Consequently gold shares should now give better exposure to gold than in the past should prices recover.

ANZ adds obviously the reverse is also true as gold miner stocks have significantly underperformed since the peak in the gold price in 2011 but the flip-side is that they are now much cheaper than gold on a relative basis and may provide good value.

ANZ still has doubts over whether this idea really does stack up but suggests that for now at least gold mine shares give better leverage to a higher gold price than physical gold.

Gold was trading at US$1154 up US$12 on Friday shortly after trading started on Wall Street.