Stocks of companies that dig up gold have been among the world's top
performers. As of the close of trading on Wednesday, the NYSE Arca Gold Miners Index was
up about 25% so far this year, compared with a roughly 1% drop in the S&P 500. Spot
gold was up nearly 9% year to date here on Thursday.
Investors use stocks as a way to double down, betting both that gold will rally and
that the individual companies will perform well as they benefit from lower costs,
including cheaper energy prices.
But many money managers say they have now pared back their holdings or stepped to
the sidelines. Drivers of gains such as uncertainty in the global economy and volatile
moves in currencies are set to fade, they say.
"The current hot topics of European quantitative easing and the Swiss franc
will become history in a week's time, and gold will top out," said Neil
Gregson, a fund manager at J.P. Morgan Asset Management, overseeing US$2.5 billion in
natural-resources investments. "When it does, I think these gold stocks are going to
fall back very aggressively."
Mr. Gregson was buying gold throughout all of last year. The metal now accounts for
about 20% of his portfolio, up from about 13%, but he says he has stopped buying and is
waiting before taking his next move.
"Gold is certainly at the forefront of our discussions because every day it
doesn't fall, the sector seems to go up another percent or two," he said.
"The thing is, it's now a trade--a very crowded trade."
Investors like Mr. Gregson say the rally is running out of steam given the recovery
in the U.S. economy and the likelihood that the Federal Reserve will raise interest
rates. The metal is typically bought in times of distress; it generates no yield, so
increases in rates on safe securities such as U.S. Treasury debt tend to weigh on the
price.
Gold rallied to a five-month high of US$1,305 an ounce earlier this week, but then
pulled back below US$1,295. Thursday morning in New York, spot gold rose as high as $1305
in response to confirmation that the European Central Bank will buy large amounts of
government debt to pump money into the economy in order to create growth, boost prices
and forestall deflation.
Some investors see gold as a better store of value than currencies or government
bonds during periods of monetary easing.
A benchmark index for gold-mining stocks in Australia--second only to China among
gold-producing countries--has risen 28% since the start of 2015, but slipped Thursday
after reaching a 10-month high intraday earlier.
Last week, money flowed out of the world's biggest gold exchange-traded
funds--typically considered to be less reactive to swings in price--implying some fatigue
among investors.
Many fund managers say they can't see a more substantial rally in gold stocks
without a further jump in gold prices.
Ric Ronge, senior resources fund manager at Pengana Capital, said he expects the
market to become increasingly volatile after the sharp rally of recent weeks.
"Now is certainly the opportunity to trade it around a little bit: Buy when
they're low and sell when they're higher," said Mr. Ronge. "It is
going to be a bumpy ride."
To be sure, the continued rise in gold-mining indices suggests few investors are
dumping shares in any big way. After years spent in the shadow of gold, as investors
chose to buy the metal itself, rather than firms that produce it, miners last year sprung
back into favor, driven by stronger earnings and cuts to mining costs, and helped toward
year-end by falling oil prices.
In Australia, investors became increasingly upbeat on the sector after a fall in the
local currency meant miners were earning more for each ounce of gold they produced.
"I remain positive on the sector in the short- to medium-term," but
cashing in on some of the profits made during the rally is "a logical step,"
said Market Matters investment advisor Alexander Aguilan. The company advises private
investors and self-managed pension funds on behalf of Shaw Stockbroking, one of
Australia's largest independent stockbrokers.
He said he has cut his holdings in gold stocks, including Australia's largest
listed gold miner, Newcrest Mining Ltd.
Others are simply keeping their powder dry.
"It has had a great run, but you really have to wonder if it's
sustainable," said Matt Riordan, a Sydney-based portfolio manager at Paradice
Investment Management, which has a total of around 8 billion Australian dollars (US$6.5
billion) in assets under management. He has held his exposure steady throughout, but says
he's now "very cautious" on the outlook for the sector.
"We just aren't convinced gold is out of the woods," he said.