Gold Stocks Regain Some Luster

The group is among the best performers in this week's relative strength list. And S&P's analyst is bullish on the industry

By Sam Stovall

Listed below are the industries with the highest S&P Relative Strength Ranking of "5" (sub-industries within the S&P Super 1500 that posted six-month price performances that were in the top 10% of all 115 sub-industries) as of Aug. 24, 2001.

One interesting thing to note about the S&P 1500 this year is that even though the index is off about 10% this year, some 58 of the 115 component industries are in positive territory year-to-date -- and the average gain is nearly 15%! Surprise, surprise. And here's an even bigger surprise: One of the 11 best-performing industries is the gold-mining group, which has struggled over the past several years.

Leo Larkin -- S&P's gold analyst - has been positive on the group for a while. "There are several reasons why we are positive on gold stocks," he says. First, Larkin thinks equity markets will offer less competition for investment demand. Double-digit rates of return for equities from 1995 through 1999 provided immense competition for gold.

Second, the analyst sees higher commodity prices in 2002, reflecting consolidation in commodity producing industries and a recovery in global economic growth. After declining 16.6% in 1998, the Bridge Commodity Research Bureau (CRB) Commodity Price Index rose 7.3% in 1999 and 11.1% in 2000. Through early August 2001, the CRB has declined 12.1% due to slower growing world economy. Larkin believes this should be a catalyst for more consolidation. Together with a rebound in the global economy in 2002, commodity prices should resume their uptrend. In turn this will boost the Producer and Consumer Price Indices.

Third, Larkin thinks the deficit between production of the metal and consumption by end-markets will widen in 2001 as output declines and physical demand increases. Also, he sees lower production in 2002 as the low gold price has led to sharply reduced exploration. Thus, production will decline or stagnate at best even if the metal price rises dramatically.

Fourth, notes Larkin, the agreement to limit gold sales through September 2004 to 2000 tons, including sales by the Bank of Switzerland and the Bank of England, removes an uncertainty that plagued the market during the late 1990s. Central bank sales in preparation for the European common currency, Australia's sale of part of its reserves in 1997 and the BOE's announcement on May 7, 1999, damaged the market.

Larkin's fifth and final reason? He says that for the first time since 1996, gold rose in nearly every major currency in 2000 but the U.S. dollar. He believes the dollar will head lower in 2001 -- giving a boost to gold.

Sub-Industry Company S&P STARS Rank
Catalog Retail Lands' End (LE)
Catalog Retail
Construction & Farm Machinery PACCAR Inc. (PCAR)
Construction & Farm Machinery
Environmental Svcs. Waste Management (WMI)
Environmental Svcs.
Footwear Reebok Inc. (RBK)
Footwear
Gold Barrick Gold (ABX)
Gold
Health Care Facilities HCA Inc. (HCA)
Health Care Facilities
Home Improvement Retail Home Depot (HD)
Home Improvement Retail
Metal & Glass Containers Pactiv Corp.(PTV)
Metal & Glass Containers
Office Electronics Xerox Corp. (XRX)
Office Electronics
Specialty Stores Barnes & Noble (BKS)
Specialty Stores
Water Utilities Amer. Water Works (AWK)
Water Utilities

Stovall is senior sector strategist for Standard & Poor's