Oil & Gold—Two Great Commodities Whose Prices Reflect the Fear in Financial Markets

The only trading action that seems to be working for long investors is in gold stocks these days. This isn’t a surprise, nor is it unexpected with the spot price of gold so high. Two more junior gold producers, AuRico Gold (NYSE/AUQ) and Northgate Minerals (AMEX/NXG), announced a deal to merge. The two juniors hope to create a new intermediate gold player and the expectation for production growth as a combined company is significant.

In this particular case, AuRico Gold is doing the buying. The company’s share price (which has almost doubled since the beginning of the year) appreciated swiftly to a recent 52-week high of $14.17 per share. Then the company announced the all-share deal to acquire Northgate. It’s a trend that we’re going to see more of over the coming quarters. With share prices lofty and bank accounts full, everyone in the gold mining business wants to bulk up before the party’s over.

The broader stock market’s trading action reflects the overall sentiment in the economy. Add in the fact that the month of September is often not a good one for stocks, and one could easily predict that the next several weeks are going to be difficult. The stock market isn’t expensively priced, but that doesn’t mean that it will be anytime soon. There’s a mini cycle going on in the stock market and it’s all about the revision of expectations for the future. Expected returns from stocks are going down big-time, as current economic data sink in. No doubt the stock market needs a major catalyst in order for it to advance. It’s unclear at this time what that catalyst will be. As is usually the case, the market will need a combination of factors to come together if it’s going to move higher in any sustainable fashion.

The S&P 500 Index did an impressive job of recovering from the 1,120 level. It clawed its way back to 1,200 and is now trying to balance itself out with the fears in the marketplace. The next major move could be anything. What’s likely in my view is that the trading action will very difficult until we get into third-quarter earnings. Any earnings warnings from corporations in this market will not be well received. The same goes for any changes in fourth-quarter visibility come reporting time. Everything now has a fragility to it—the economy, financial markets, and expectations for the future. The only exception is the market for gold; investors still view this specific asset as a haven, even though the spot price has already gone up dramatically.

The best near-term indicator for share prices continues to be the spot price of oil. A weaker oil price is exactly what the economy needs, but it also serves to illustrate declining sentiment about the future. Stocks won’t advance until the economic news shows some major improvement.


Oil & Gold—Two Great Commodities