Jewelry Demand May Revive Gold, Mining Stocks: Chart of the Day

Growing demand for gold necklaces, watches and other jewelry may bolster the price of the precious metal and the shares of mining companies, according to Brian Yu, a Citigroup Inc. analyst.

As the CHART OF THE DAY shows, smaller year-to-year gains in gold prices since 2001 have usually coincided with increases in jewelry purchases, and vice versa. The comparison is based on quarterly figures compiled by New York’s Comex and GFMS Ltd., a precious-metals research unit of Thomson Reuters Corp.

"We would expect a demand response to weaker pricing," Yu wrote two days ago in a report with a similar chart. Gold fell in April by 7.7 percent, its sixth loss in seven months. During the month, the metal suffered its biggest two-day decline since 1980 by tumbling 13 percent.

Gold prices and jewelry demand showed a correlation of negative 0.57 for the past three decades, according to the San Francisco-based analyst. The correlation could have ranged from negative 1, which would mean they went in opposite directions, and 1, which would show they always moved in lockstep.

The precious metal fell 12 percent during the first four months of this year. Mining stocks did far worse, as the NYSE Arca Gold Miners Index tumbled 35 percent. Shares of Newmont Mining Corp., the largest U.S. producer, dropped 4.6 percent yesterday on disappointing first-quarter profit and revenue.

Yu cut earnings and share-price estimates on Newmont the day before the results were released. He’s neutral on the stock as well as Goldcorp Inc., the world’s second-largest gold miner by market value. Barrick Gold Corp. is his favorite gold stock, and he recommends buying Kinross Gold Corp. as well.