Gold Stocks (GDX) Tumble, 2008 Redux Ahead

GOLD STOCKS NEWS – Gold stocks tumbled Thursday as the Market Vectors Gold Miners ETF (GDX) fell $1.35, or 2.3%, to $57.95 per share. The sell-off in gold stocks and the GDX was fueled by a plunge in gold futures after the CME Group raised margin requirements on the COMEX. Gold futures reached a new all-time record high of $1,817.60 per ounce, but plummeted to $1,757.10 as of 10:45am ET. The S&P/TSX Global Gold Index, Canada’s leading gold stocks composite, dove 3.0% alongside the GDX.

Gold stocks and the GDX have experienced significant volatility in recent months – in concert with the broader equity markets. Escalating concerns over the status of the U.S. and European economies has led to widespread liquidation across many asset classes. However, the gold stocks sector has significantly outperformed the broader market indices – with the GDX falling just 6.8% since April 30, compared to a 15.9% drop for the S&P 500 Index.

The broader market weakness has led to many calls for a redux of 2008, when all sectors of the equity markets – including gold stocks – came under heavy selling pressure. Dundee Securities discussed the outlook for gold stocks in light of these developments in a recent report to clients. “While we wish it were otherwise, we can’t help but draw parallels between the markets of today and those at the beginning of the financial crisis of 2008,” analyst Paul Burchell wrote.

Burchell noted that although gold stocks and the GDX plunged during the peak of the crisis in October 2008, the sector quickly rebounded. “This time around, we haven’t seen a vicious sell-off in gold stocks – possibly due to the fact that as a group gold equities are relatively undervalued as compared to three years ago,” he continued.

Looking ahead, the Dundee Securities analyst contended that “We remain bullish on the longer term prospects for the yellow metal and we continue to recommend investors look to the large and intermediate gold producers as a hedge against what could be volatile markets.”

As for smaller gold stocks, the firm wrote that “We remain bullish on the longer-term prospects for the smaller producers and developers/explorers; however, risk averse markets generally shy away from these inherently riskier stocks and they could underperform their larger brethren should uncertainty continue to be a dominant theme.”

Notable gold stocks moving lower alongside the GDX on Thursday included Barrick Gold (ABX), which fell 2.1% to $48.62 per share. Goldcorp (GG) slid 3.0% to $49.02 per share, while Randgold Resources (GOLD) retreated 2.4% to $101.36 per share. One name that bucked the trend of lower gold stocks was Newmont Mining (NEM), which climbed 1.2% to $56.50 per share.

Gold Price Dives as CME Hikes Margins

GOLD PRICE NEWS – The gold price dove Thursday morning after the CME Group raised margins on gold futures contracts by 22%. The price of gold traded to a new all-time high of $1,815 per ounce overnight before falling back to $1,775. Initial margin will climb from $6,075 to $7,425 and variation margin – for hedging purposes – will move up to $5,500 from $4,500. The move by CME led to liquidation in electronic trading on the COMEX.

TD Global Precious Metals team expressed caution with respect to gold prices, noting “With all the market and social chatter about the gold price, and the parabolic price action of the past week, it feels more and more like a text book blowout top. So caution is warranted for longs, and paramount for fresh longs, but as it has proven again this week, and numerous times in its decade long bull run, trying to pick a top in gold is a painful and expensive trade.”
Despite numerous calls for caution by Wall Street strategists, the gold price continues to post fresh record highs on almost a daily basis. The price of gold briefly surpassed $1,800 per ounce for the first time and maintained the large majority of its gains throughout the day. COMEX gold futures have displayed a marked increase in volatility, a key reason for the increase in margin requirements.
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$2,000 Gold in 2012, But “High Probability” of a Bubble

Gold will reach $2,000 per ounce by 2012, but there is a “high probability” of an eventual bubble in the yellow metal, according to Deutsche Bank.

In its latest outlook on the gold market, Deutsche Bank wrote that “We believe the main beneficiary of super low interest rates in the United States, a weak U.S. dollar, a view that central bank holdings in the U.S. dollar are still excessive and ongoing questions over the stability of the financial system will be gold.”

With regard to the potential for a gold bubble, the firm cautioned that a “high probability” exists that a bubble may be developing in the gold market. Deutsche Bank’s assertion was based on the recent tendency by investors to acquire positions in gold when the U.S. dollar is both rising and falling, and to buy gold as a hedge against inflation and deflation.