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Making the Most of Rising Gold Prices

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"The dominoes seem to have started to fall, and the best way to capitalize on rising gold prices is to invest in small- and mid-sized gold miners, as opposed to the yellow metal itself."

The dominoes seem to have started to fall. Portugal has finally admitted that its debt level is unsustainable and asked for help from the European Central Bank, following Greece and Ireland earlier this year.

Debt levels in the eurozone, the U.S. and Britain are so high that nobody knows how and when they may become serviceable. In the meantime, the fresh printing of money is likely to devalue the respective currencies and raise inflation.

The unfortunate result is that vital supplies of oil are constrained, pushing prices high. Coupled with the catastrophic events in Japan and its need to rely more on oil, natural gas and coal imports, the price of energy is set to stay high.

The inflationary effect on the developed economies is clear and is likely to provide further support to high gold prices. It is not unlikely that we may see an ounce of gold selling for more than U.S.$1,600 before the year-end.

We believe that an attractive way to capitalize on rising gold prices is to invest in small- and mid-sized gold miners, as opposed to the yellow metal itself.

A rise in the gold spot price has a significant impact of the profitability of these companies, which can subsequently lead to a re-rating of the shares.

Even without further increases in the gold price, there are opportunities for the re-rating of junior gold mining companies' shares.

The key requirements for a company's success are significant reserves in the ground, cashflow growth, low debt and a proven management team with the ability to add to reserves. These companies should outperform both the market and the sector.

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