Will the Rise in Gold Price Fuel a Rally for Gold Producers Stocks?

In a recent review by Bloomberg, Barrick officials claim that gold producers’ stocks are due for a rally after they have been underperforming for years compared with the sharp gains in gold price.     

Is Barrick, the leading gold producer in the world due for a comeback in 2012? Barrick officials claim that not only Barrick but also other leading gold producers didn’t enjoy the rally of gold price in recent years as many investors seek gold based funds such as SPDR, and thus rendering metal producers’ stocks cheep. This argument has some merit because SPDR didn’t expand very promptly during recent years.

Without getting into a micro analysis on Barrick’s financial reports, even though a quick glance does show an operational loss during 2009, let’s examine the situation from a macro perspective by comparing gold price with Barrick’s stock performance in the last few years. With this information let’s try to answer is it likely that Barrick will make a comeback on account of the high price of gold?

Gold price and Barrick Gold Corporation Common 2008-2012

The chart above shows the developments of gold price and Barrick’s stock between the years 2008 and 2012. We can extract four main points from this chart:

  • While gold price had a steady growth and eventually (up to February 2012) rose by nearly 90%, Barrick’s stock slipped by 1.9%.
  • The stock of Barrick took a dive during 2008 and shed nearly 28% off its value while gold price (average monthly price) declined during 2008 by only 8%.
  • Between 2009 and 2010 both gold price and Barrick’s stock had an upward trend as they have had a positive correlation of 0.24 (between 2008 and 2012).
  • Finally, during 2011 Barrick fell by 14% while the average gold price rose by 18%.

Therefore, the possibility of Barrick’s stock making a comeback only because of the currently high gold price seems less likely given Barrick’s performance during 2011. Don’t forget that during 2010 when Barrick rose by nearly 36% its operational profitability was nearly 40% and its net profitability was nearly 29%. So even though gold price had a big part in reaching this profitability, without having such big numbers the stock probably wouldn’t have made such a comeback in 2010.

It leaves us with the possibility that Barrick’s price will rally if gold will have another monster year as it had back in 2009 or 2010. But since there are little expectations (at this moment) that gold price will sharply rise and reach the $2,000 mark by the end of the year, I speculate a comeback of Barrick solely because of the future development of gold seems less likely in the months to come.

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Disclaimer and Disclosure:

This is by no means an investment advice only general market analysis. See here full disclaimer.

The Author has no position in Barrick, SPDR or gold.

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