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Gold stocks soar: Is there further to run?

What: Last week as investors were inundated with Annul General Meetings (AGMs), the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) fell 2.7%. The market’s fall can at least partially (perhaps substantially) be blamed on the poor outlook statements provided by companies holding AGMs. Take for example Sonic Healthcare which slumped 8.1% for the week after lowering its FY 2015 forecast.

Despite the numerous stocks dropping lower, there were some stocks which shone brightly…

Gold miners Medusa Mining Limited (ASX: MML), Northern Star Resources Ltd (ASX: NST), Regis Resources Limited (ASX: RRL) and Newcrest Mining Limited (ASX: NCM) all ended the week significantly higher.

In fact, out of all the S&P/ASX 200 constituents, these four gold miners were amongst the top five gainers for the week! Medusa and Northern Star both produced double digit gains of 16.2% and 10.2% respectively, while Regis and Newcrest gained 9.3% and 6% each.

So what: Gold is currently trading at around US$1,200 an ounce which is not that far above its five-year low of US$1,061/oz (according to Kitco.com). It’s also a far cry from the US$1,900/oz level reached back in 2011.

It’s a similar story for the above four gold producers with all except Northern Star trading well off their five-year highs.

Now what: While the soft oil price could perhaps suggest a benign environment, it may actually be more a sign of weak demand brought about by slowing global economic activity. Indeed Japan –the world’s third largest economy – just last week was declared to have slipped back into recession despite billions of Yen being pumped into the economy.

The potential for further monetary stimulus around the world is also impetus for gold bulls to predict a surge in future global inflation – which could well turn out to be right. This scenario, coupled with geo-political tensions, could set the stage for a rebound in not just the gold price but gold producers too.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

 

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