As Gold Cools, Its Miners Are the Next Hotspot
Source: Reuters (2/26/09)
"The price of gold might again be testing record highs. . .but shares in companies mining the precious metal now look a better bet."
With financial markets tumbling and currencies crumbling, investors have fled to gold as a traditional safe haven in times of trouble, and as a bulwark against the long-term inflationary effects of massive and various government stimulus packages and monetary easing by central banks.
However, there may not be much upside left in the yellow metal, as the appetite for jewelry, which accounted for nearly 60% of global gold demand last year, falls in step with the slowing global economy.
Shares in gold miners, however, have not kept up with the metal's prices and should do well, despite the volatile stock markets, for investors with a high-risk tolerance.
"You're likely to have better performance in the equity, because it has lagged, and there is not much catalyst for the upside in the gold price itself," said Bradley George, fund manager and head of global equity resources at Investec.
George said he expected gold to trade within a range of $930 to $1,050 an ounce, with the upper end capped by weaker jewelry demand and the downside supported by safety-first investors looking to preserve cash.
Frank Holmes, chief executive of fund manager U.S. Global Investors, expected companies with strong financial discipline and no hedging would outperform gold prices.
U.S. Global Investors' Holmes warned the volatility of gold mining shares was far greater than bullion, however, adding that for every 1% fall in the price of gold, gold miners' shares would fall 3%.
Holmes, who recommends investors hold 5% of their portfolio in bullion and another 5% in gold miners, also said the gold price could correct in the short-term but has the potential to rise to $1,500 an ounce.
UBS was also wary that a bear-market rally in equities could see a fall in the gold price, citing large, long gold positions on New York Mercantile Exchange's COMEX.
But with the bleak economic outlook casting gold as an insurance policy for some time to come, many investors will want to keep up their premiums.
"If you are looking at more from a capital preservation point of view. . .then I would go into the gold commodity," Investec's George said. "Whereas if you are looking for some actual performance and you are prepared to tolerate the risk and the volatility in the equity market, then I would look to some of these gold producers."