GOLD PRICE NEWS - The gold price, at $1,238 per ounce, traded marginally lower into the last day of the second quarter. The price of gold is up 2.1% in June, gaining 13.3% thus far in 2010. The most recent quarter has been a rough one for equity prices, which are set to fall by over 9% as measured by the Dow Jones Industrial Average (DJIA). In contrast to the 11.6% second quarter rise in the gold price, the DJIA will post its first quarterly loss since the first quarter of 2009.
Cyclical commodities have similarly underperformed the gold price this year, as oil and copper have dropped 4.3% and 12.1% in 2010. The economic recovery that began in 2009, sparked by aggressive fiscal and monetary policy, has showed signs of waning. Yesterday’s bloodbath on Wall Street spared no sector as 499 out of the 500 stocks that comprise the S&P 500 closed lower. The benchmark index declined 3.1%, leaving the S&P 500 (SPX) lower by 6.6% for the year.
Unemployment remains a concern and continues to be a drag on consumer spending. This morning, ADP released its monthly employment forecast for June and the data came in lighter than expectations, showing a 13,000 rise in private sector jobs. The Labor Department will release the June employment report on Friday, which is forecasted to show a change in nonfarm payrolls of -115,000 and a change in private payrolls of +110,000 according to Bloomberg. The drag from a 9.7% unemployment rate continues to provide a rationale for near zero interest rates and accommodative monetary policy - a fact that has provided a tailwind for the gold price.
In recent quarters, the gold price has been joined on the upside by very few asset classes with the exception of government bonds. The two-year and ten-year Treasury yields have sunk to 0.57% and 2.92%, respectively. Deleveraging in the economy continues to run its course despite the best efforts by central bankers to prevent the business cycle form running its course. Rising gold prices are a symptom of deteriorating confidence in the international monetary system. The gold price is rising against virtually every currency in the world.
Gold stocks were set to open marginally higher despite a small decline in the gold price. The gold miners were weak in yesterday’s trading session, plunging in tandem with falling stock and commodity prices. The Market Vectors Gold Miners ETF (GDX) fell 2.7%, leaving the most widely-held gold stock ETF up 12.5% thus far in 2010. Trailing the GDX is the Philadelphia Gold and Silver Index (XAU), a cap-weighted index of the largest gold and silver miners, which was created in 1979. The mere 5.7% rise in the XAU - a poor showing relative to the 13.2% rise in the gold price - is due partially to the poor performance of Freeport-McMoRan Copper and Gold (FCX), which makes up 13.25% of the index despite it being chiefly a copper producer and partly due to its heavy weighting in the mega-cap gold producers. A number of more nimble small- and mid-cap gold producers and explorers have appreciated at multiples of the GDX and XAU.
Given the potent move in the gold price above $1,200 per ounce, gold producers should begin delivering on their promise to investors of leverage to the gold price. First quarter earnings in the gold sector showed initial signs of stronger profit margins. The low in the gold price during the second quarter was $1,111 per ounce while the current average is just under $1,200 at $1,196.50 per ounce. This record high average price of gold should equate to stronger revenues, more robust free cash flow, and improved bottom-line earnings. A broad range of high-profile institutional investors, including John Paulson, George Soros, and David Einhorn have made the bet that gold stocks will begin demonstrate results. Now it is time for them to deliver.
