Gold equities are oversold, TD says

While gold prices have had a tough time lately, they continue to dramatically outperform the gold equities. The stocks have been in a dreadful tailspin since July, and are showing almost no signs of life.

Part of this is nothing new — the equities have almost always underperformed the gold price in recent years. But as TD Newcrest analyst Greg Barnes points out, they now trade at levels not seen since August 2007, when the price of gold was in the mid-US$600s per ounce.

"Effectively, the entire late 2007/early 2008 rally in gold stocks has been erased," Mr. Barnes wrote in a note to clients. He attributed it to a few logical factors: the recent correction in prices, rising operating costs, and lowered production guidance from several of the large-cap companies.

His view is that the equities are currently factoring in gold prices of between US$600 and US$700 an ounce. Given that gold currently trades above US$800 an ounce, he figures they are oversold.

"While it is difficult to predict the short-term direction of the gold price in the context of this market, for gold exposure we would recommend owning large-cap gold equities with low costs and production growth," he wrote. He singled out Goldcorp Inc. and Yamana Gold Inc. as top picks.