Monday, January 07, 2008

What Went Wrong for Canadian Gold Stock Investors in 2007?

7 January 2008

Let's wrap-up 2007 for Canadian gold investors - quickly....

Gold in US dollars had a dramatic year, up from about $635 to $860 US. That's approximately a 35% gain. What a year for US-based holders of gold!

The Canadian dollar climbed from $0.86 to $1.01 US, for a 17% gain. Obviously this means that Canadian dollar-denominated investments underperformed US dollar-denominated investments - but in local terms only. The upside is that Canadians gained in the international purchasing power of our currency. Not a bad bargain for Canadian investors....

Interestingly, Canadian dollar-denominated gold also did well, moving up from about $735 at the start of the year to close at $830. That's a 13% gain. And, in terms of international purchasing power, the gains for holders of gold in Canada and the US were of course equivalent.

However, here is the rub - a problem I have been commenting on all year.

Canadian gold stocks could not begin to match the performance of gold, regardless of its currency denomination. The SPTGD gold stock index started 2007 at about $325, and wrapped up the year at $310, down 5%. That is a meagre performance for a sector whose primary referent has just nailed down one of its best years in history.

So, let's just say that Canadian gold stocks dramatically underperformed last year. And I mean dramatically!

So, how did gold stocks in the US measure up? Well, the Amex HUI "Gold Bugs Index" of unhedged gold miners managed to log one of its best years ever, right in step with gold. The HUI ended the year up 28% in US dollar terms, outperforming the Canadian SPTGD index by 33%.

In short, the US HUI index outperformed Canadian gold stocks by double the amount of appreciation in the Canadian currency (33% better than the SPTGD index, divided by the 17% gain in the Canadian currency).

If you want to measure the HUI in Canadian dollar terms, the gains were less dramatic, but positive, up from about $390 to $410, for a 5% gain - 10% better than SPTGD's 5% loss, when both are taken in Canadian dollar terms.

My prediction - Canadian gold stocks are set to rebound in 2008, possibly dramatically. And if I'm wrong? Well then, I'll just move back to the US and keep my investments in US gold stocks!

I'd prefer not to see another year like this one. Ever again!

1 comment:

  1. I believe that gold stocks have gotten a bit ahead of themselves here. I would wait for a pull back.