Practically all major stock markets in the world have had hair-raising tumbles in August, with one exception: Toronto.
In the midst of the market storm, Toronto has avoided the worst of the carnage that has swept through other stock exchanges. Over the past month, while the S&P 500 index in the United States lost 9.6 per cent in Canadian dollar terms, and Germany's DAX index plunged 17.3 per cent, Toronto slid a mere 4.9 per cent.
What explains this exceptional performance? Canada is benefiting from a host of positive factors, the top one being that the Toronto market has a lock on many of the world's gold mining stocks. With the bullion price hitting a record high of more than $1,800 (U.S.) an ounce earlier this week, companies that mine gold have been on a tear, even as the stock market overall has been on shaky ground.
"If you want to invest in gold, [Canada is]where the stocks are, by and large," says David Baskin, president of Baskin Financial Services Inc., a boutique investment counsel.
To be sure, the Toronto market enjoys other positives, including relatively good banks, a heavy weighting to solid, dividend-paying utilities, and this country's stable politics.
It's the rush to gold, however, that has been the dominant theme in recent days, as anxious investors seek a haven from euro-zone debt worries and a slowing U.S. economy. The TSX composite includes about 40 precious-metals miners among its 260 listed companies, including the world's two top companies in the sector, Barrick Gold Corp. and Goldcorp Inc.
The gold companies as a group account for about 13.8 per cent of the TSX composite's market capitalization. Few other markets in the world have this kind of concentrated exposure to gold. Even the resource-heavy Australian exchange has only a 3.6-per-cent exposure to the metal.
The outsized influence of gold on the Toronto index has become more pronounced over the long bull market in precious metals. In August, 2002, when the upturn in gold stocks was in its early days, the TSX's weighting to the metal was a mere 4.9 per cent, according to figures provided by the exchange.
With gold now accounting for so much of the index, the red-hot sector has been able to give Toronto stocks an extra lift, even when equities are weak on other bourses.
Some investment pros say this effect harks back to the tech mania of the late 1990s when Nortel was a dominant influence pushing the TSX upward, before the telecom darling crashed and burned.
"What we're seeing is sort of like a Nortel effect," says John Ing, president of Maison Placements Canada Inc.
The gold factor was at play on Thursday, only in reverse, as the price of the precious metal fell about 2.5 per cent following an increase in margin requirements for gold-based commodity futures contracts. While the Dow roared ahead by 423 points, or 3.9 per cent, on the back of better U.S. jobless claims data and a good earnings report by tech bellwether Cisco Systems, the TSX composite managed a smaller gain of 341 points, or 2.8 per cent. Gold shares as a group ended the day little changed.
Mr. Ing, who is positive on the price of gold, believes that the TSX's tilt toward gold will become even more pronounced as more money flows into the sector. He projects the bullion price could average as much as $2,011 an ounce this year, driven by worries over inflation, as well as high demand from people in countries like India and China.
But others aren't so sure that bullion will continue to help the TSX. Like Nortel before it, the gold sector could turn into a drag on the Canadian market.
Mr. Baskin says much of the recent inflow into gold and gold mining equities has been driven by investors worried that the U.S. and other major economies are going to head into a double-dip recession, raising the risk of a financial panic.
Instead, the global economy could settle into a pattern of anemic growth, just enough to avoid serious financial instability. Mr. Baskin speculated that gold might then fall back to the $1,200-an-ounce area it traded in a year ago, and the TSX would look far worse because of its heavy gold exposure.