Gold futures briefly touched the $1,000-per-ounce level this morning in Tokyo, the first time a front-month contract has reached that level since February of this year. December gold subsequently pulled back slightly to trade at $999. When gold trades up like this, there are some surprises that usually occur. Gold is usually seen as a harbinger for inflation because of its nature as store of value. Gold is also seen as the opposite of currencies notably the U.S. Dollar so it is likely that the U.S. currency is headed lower against the Euro and the Yen.
What is more significant I think is that when gold spikes like this, it signals that people’s appetite for hard assets. While there will always be demand for financial assets, the world’s biggest portfolios will start to adjust asset allocation to put weight on resource and commodity stocks because profit margins will widen in this sector. Recently, we had seen quite impressive moves in mining shares notably Philex (PX). There have been speculations as well on start-ups like GEO and NI. While LC & LCB had a big move a few weeks back, it has been in the doldrums except for last Friday when it started to firm up.
In the distant past, spikes in mineral prices had always been good for the Philippine stock market, but that was at a time when the local equities markets were dominated by mining shares. Today, our market is more diverse and mining stock constitute a very small portion of the index.
So, is gold at US$1,000 and ounce going to affect our market positively? My gut feel says yes. In this part of the world, only 3 markets are viewed as influenced by resource plays: Australia, Indonesia and the Philippines. What is notable is that China continuously comes to the Philippines for some of its mineral needs notably copper and nickel. That keeps our market high on the resource based markets in the world in spite of the fact that we have very few operating mines compared to Indonesia and Australia.
Going to the broader market, there has been a lot of talk of consolidation going on. Friday’s unemployment figures in the U.S. was not at all encouraging as the number rose to 9.7%. Some analysts are of the opinion that if they counted job-seekers who have already dropped out because of discouragement, the figure would even be greater. In spite of this negative news, a recent Price Waterhouse Coopers (PWC) survey of large U.S. industrial companies reveal that they were a lot more optimistic about the domestic and global economies today than three months ago.
I think that consolidation will go on for the next two weeks since the Asian markets are just as poised as the U.S. market to reassess whether or not the markets have become extremely optimistic about future earnings. Instead of an upward trending market, I think we will be trading a range in the headline stocks such as AC and TEL. What I like about it is that both these stocks have an identifiable range: AC – buy below or at 300 and sell at or above 315; TEL – buy close to 2400 and sell just below 2600. It takes some patience to do that but that is a game that is worth playing. MBT may also be a buy at below 38 and sell at 40, just to play the range.
As to other counters, I still believe that undervalued stocks like PNB, EEI, SPH,PIP and TUNA should be considered as buys as well.