Commodities: Gold Equities Could Finally Start to Perform
Author: Garry White, and Emma Rowley
Posted: January 23, 2012
Gold equities have underperformed for more than a year despite the gold price hitting a series of new all-time highs. But things could be about to change.
Investors have preferred to invest in physical gold, despite the storage costs, and exchange-traded funds (ETFs), as they are perceived to be less risky than mining companies.
Paul Hissey, an analyst at Goldman Sachs, thinks miners need to do a number of things to entice investors away from gold ETFs, including reducing perceived operational risk; deliver to, and manage market expectations; return cash to shareholders; and replenish resources and reserves.
"However, we will continue to favour exposure to gold companies in the current global financial climate," said Mr Hissey.
Analysts at Nomura agree, with the Japanese broker initiating coverage of the European gold sector last week with a bullish rating.
"A cash build in the producers should drive growth, spur M&A and push dividends higher," said Tyler Broda, a mining analyst at Nomura. "This improving outlook has yet to be priced into gold equities, which are trading at historical lows in terms of valuation," he said. Mr Broda thinks current valuations offer an attractive entry point given market instability. "We see light at the end of the tunnel for gold equity investors."
Nomura concludes that the gold price should stay elevated with significant upside risks all the way to 2015, which they believe will translate into "a new era for gold producers". Mr Broda's top picks are Randgold Resources, African Barrick Gold and Avocet Mining.
However, some are more cautious. Last week, precious metals consultancy GFMS said in an update to its Gold Survey 2012 that the decade-long bull run could come to an end in 2013.
"The report does acknowledge that the gold market is nearing the closing stages of its decade-long bull run and that, once the macroeconomic backdrop changes and investment in gold fades – probably some time next year – a secular retreat in the price will unfurl," said GFMS.
"A combination of factors will ensure that sufficient demand from investors and to a lesser extent official sector institutions comes into the market for it to clear at higher levels," added GFMS.
However, Mr Broda is more bullish on demand from the official sector.
"Central bank demand has the potential to grow from virtually nothing to nearly half of the level currently seen by jewellery, which accounts for 40pc of the market," he said. "This, in conjunction with a potential wider shift in asset allocation to gold, could see gold prices de-anchoring from current levels."
