Gold Equities Need More Bullion Support

Gold equities need the periodic adrenaline rush which comes with a rising gold price to sustain performance. The chart illustrates the leveraged response of gold equity prices (using the NYSE gold "BUGS" index ) to movements in the gold bullion price since the beginning of 2014. Unsurprisingly, the 7% fall in the gold price since late May 2015 has come with a larger fall - 28% - in equity prices. Gold equity prices are now set up for a 4-5X multiple response in the event of a rise in gold prices. From this perspective, the short term balance of risks has tilted in favour of equities. Without a higher gold price, however, margins will be compressed by rising costs and valuations eroded. A continuing fall in the gold price - even at the currently gentle pace - will erode already slim profit margins implying an accelerating fall in equity values. This plays into the longer term theme that the balance of risks favours holding physical gold (or a paper representation) rather than the equity equivalent.