Monday, December 22, 2008

Gold Stock are the Go, Newcrest in particular

Newcrest is unhedged and in fine form, its input costs have improved due to lower oil and labour costs.

The equity market has finally seen a ray of hope and so have equity-linked mutual

While a majority of the equity schemes generated one-month trailing returns in the range of 1-6 % as on December 17, ’08, there are a few schemes whose returns are as high as 10-11 % for the same period.

However, the biggest gain during this period has been observed in the case of world gold funds. Currently, there are only two such funds in the country — DSP BlackRock World Gold Fund and AIG World Gold Fund — and both these funds have shown an outstanding recovery. While the former’s one-month trailing returns stand at a handsome 43%, the latter has managed to generate 35.2% during the same period.

These gains can be attributed to the outstanding recovery seen in the stock prices of gold mining companies across the globe. Over the past one month, the stocks of many of the gold mining companies in which these gold funds invested have generated high returns ranging from 48-70 %. These include stocks like New Crest Mining, Barrick Gold Corp, Newmont Mining, Lihar Gold and Randgold Resources, among others. The FTSE All Gold Mines Index and S&P 500 Gold Index have both returned about 65% during the period.

Gold funds are different from gold exchange-traded funds (ETFs) and should not be confused with the latter. Gold funds are MFs that invest primarily in the stocks of companies that are actively into mining of gold and other precious metals like platinum, silver and also diamonds. Gold ETFs, on the other hand, invest solely in pure gold. Since gold funds invest in equities of gold mining companies, their correlation with the equity market is much higher than that with gold bullion, and hence, they are known to move in tandem with the equity market.

Both gold and equity have gained momentum in the past month, despite the commonly known inverse relationship shared by these two asset classes. While on the one hand, the BSE Sensex has gained about 12.7% since November 18, ’08, on the other hand, gold prices in India have risen about 10% since then. If one were to analyse the returns on a global scale, international gold prices have gained about 17%, while the Dow Jones has increased about 5% over the same period. Hence, it is interesting to see these two asset classes moving in sync with each other, even though they had a high negative correlation over the past one year, at -0 .5.


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