Analysts look to Russia for hints on gold

Precious metal stocks, already bloodied by low gold prices, took another beating recently as fears of a big sell-off in the Soviet Union kept the yellow metal below its 52-week trading range of US$350-415 per oz.

Shareholders of Placer Dome (TSE), Pegasus Gold (TSE) and International Corona (TSE), for example, saw their shares hit bottom last week after gold fell to US$343, its lowest level in two years. Other leading producers, like Echo Bay Mines (TSE), Rayrock Yellowknife Resources (TSE), Teck (TSE) and LAC Minerals (TSE) are trading either at or uncomfortably close to their yearly lows.

Gold’s latest slide was sparked by false rumors that 11 million oz. were being shipped out of the Soviet Union for sale on European money markets. If the Soviet states are forced to sell more gold to pay for their newly won independence, gold could move toward US$320 and add pressure to shares of North American producers, says Paul Carmel, an analyst at Levesque Beaubien Geoffrion in Montreal. East German modernization and the cost of rebuilding in the Middle East are other factors that analysts believe may affect the near-term price of gold which is already down by 11% since the beginning of 1991.

Within the same time frame, The Toronto Stock Exchange’s gold index has fallen off by 18.6% and but for the performance of American Barrick Resources (TSE), the index would have dropped by 25% since Jan. 1, says Ron Coll, a precious metals analyst at McLean McCarthy in Toronto. The gold and silver index makes up about 8% of The Toronto Stock Exchange’s 300 index which in turn represents a wide measure of Canadian share values.

While analysts agree that lower mine production will eventually combine with high demand for gold jewelry to move the price up to around US$400, they say a number of factors, particularly producer hedging, will prevent it from reaching that point in the near future.

“A lot of producers have been caught behind the eight ball because they have to watch their hedging programs for 1992,” said Coll. He was referring to the tendency of companies to protect themselves against fluctuating prices by selling forward their production at a set rate.

He said the latest slump in the price of gold only underlines the need for companies to protect themselves on the next rally. As a result, he and other analysts expect gold producers to remain under pressure because of the reluctance of many to hedge over 50% of annual production.

“Obviously as the gold price declines, the hedge price follows suit, and lower margins are achieved,” says Jim Perrone, analyst at Sanwa McCarthy Securities Ltd. in Toronto, who expects gold to remain within a 10% range of US$365, its average price so far this year.

Due to high profit margins and rapid growth enjoyed by many gold producers in recent years, Canadian gold stocks have traded at a premium to other equities in terms of price earnings ratios, Perrone said. “It is our view that these premiums have started to decline and may continue to do so in the near future.”