One of the best barometers on the state of the stock market and investor sentiment is actually the price of oil. Obviously, low oil prices are helpful to consumers, but from a financial market viewpoint, they express the opinion from speculators that economic activity is challenged. On the other hand, it’s arguable that gold prices represent fear in the global economy. But as a commodity, gold can’t seem to accelerate in this market; it’s just holding around $1,730 an ounce.
One precious metal that is slowly ticking higher is silver. It’s doing a bit better than gold lately, and silver-watchers argue that the commodity is due to catch up to the price of gold, as it’s been laggard over the last few years.
Even though gold prices are holding at their current levels, a lot of gold miners have done terribly on the stock market this year, especially in the large-cap space. You’d think that the stability in gold prices would be helpful, but one material trend among gold miners this year is that costs have gone way up. From start to finish, it costs a lot of money to produce a bar of gold. Barrick Gold Corporation (NYSE/ABX) illustrates this poor stock market performance. This stock has been trending lower for the last two years.
Chart courtesy of www.StockCharts.com
There is an underlying trend in the stock market as it relates to precious metals. Producing mining companies don’t really advance on the stock market unless the underlying spot price of the commodity is doing so. You can have the best business growing its revenues and earnings, but if spot gold isn’t advancing, it’s highly likely that the stock won’t either.
This is the reality for gold stock investors. You can argue that gold prices are strong and certainly stable, and this stability should be met with solid earnings growth. (See “Look at These Big Capital Gains in Gold and Silver Stocks.”) But the stock market performance of many gold stocks has only been mediocre, and the selection of the best gold mining companies is very small.
Gold is an important component for any stock market portfolio. What gold needs to accelerate in price is a catalyst, and there isn’t one right now. A large drop in the U.S. dollar or a major acceleration in the Chinese economy would be possible catalysts. I’m bullish on gold prices and some gold stocks going into 2013. So far, however, getting spot gold over $1,750 an ounce has proved to be difficult.