Mining Stocks to Out-Sparkle Gold


"Gold miners' margins are growing significantly, while premiums remain low for the time-being."

Reuters, Amanda Cooper

Gold's status as a quasi-currency and safe haven has helped pushed the price of the metal up about 20% since the start of the year to above $1,520 an ounce, making it one of the top performing asset classes of 2011.

That compares with an 8% drop in the ARCA Gold Bugs index, which includes shares in some of the world's largest gold miners.

The U.S. Federal Reserve's $600B bond-buying program; the disaster in Japan and violence in the Middle East; evidence of sluggish U.S. growth and concerns about China have all boosted gold but dented global stocks. And gold shares have not been immune.

Now that the Fed's easing program has come to an end, Japan is recovering and China has managed to stave off some of the biggest fears about price pressures, there is some doubt that gold can keep up that strong performance.

Gold stocks, meanwhile, are supported by a gold price near record highs and may benefit from improving sentiment for equities markets. They also appear relatively cheap.

Catherine Raw, who helps manage BlackRock's $4.7B Gold & General Fund, said the rise in the gold price has outpaced cost inflation in the industry, meaning that gold miners are likely to see their margins and their profits increase this year.

"If you're prepared to be patient, then I would see now as a very good buying opportunity," she said.

"The fundamentals of gold companies have improved, and yet their shares have fallen, and you've seen valuations now much more comparable to the rest of the mining sector. So you're not having to pay a ridiculous premium as you would have done say five or six years ago, and yet margins are growing significantly, in a way that they weren't five or six years ago," Raw added.

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