In a stock market darkened by a troubled economy and accounting scandals, one investment still shines: gold shares.
The S&P Gold Index, which includes North America’s largest gold producers, has been the best sector performer this year, and the rally is not going to end any time soon, say money managers.
Gold prices have been on a bull run this year amid concerns over financial irregularities in Corporate America, a slumping US dollar, and tension in the Middle East. This has made gold miners one of the few safe havens in a troubled equity market.
”Gold prices and shares in gold companies are the same thing, and the gold rally has not ended yet,” said Shanquan Li, portfolio manager of the Oppenheimer Gold and Special Mining Fund, which has $200-million in assets.
”Given the current political and economical turmoil, gold is not going back to its old lows any time soon.”
Up from a 20-year low of $253 an ounce in 1999, gold closed Wednesday at $320. Bullion prices have rallied about 15% this year, helping lift the S&P Gold Index up 31,8%. The overall S&P 500 index fell 13,5% this year.
Strong fundamentals
Like oil companies, which benefit from rising oil prices, gold companies rally on stronger gold prices. Shares in gold miners have on average over the past decade risen three percent to four percent for each one percent rise in gold prices, said Michael Dudas, an analyst at Bear Stearns.
Shares in Newmont Mining Corp., the world’s No. 1 gold company, have risen about 50 percent this year, while shares of Barrick Gold, the world’s second largest miner, are up about 23%.
Gold miners have been a prime beneficiary of a weakening dollar. Concerns over the the strength of the economic recovery in the United States sent the dollar to two-year lows against the euro on Monday, making dollar-denominated bullion cheaper for investors outside the United States.
With the equity market under scrutiny from accounting scandals and against a backdrop of political and economic turmoil, gold has regained its reputation as a safe haven. Nervous investors have turned to gold mining stocks amid this turmoil, say money managers.
But the industry is not winning by default, having gone through a period of rapid consolidation. Inefficient mines have been closed and companies are now more disciplined with spending. With the fundamentals in the sector — strong demand and limited supplies — still solid, shares in gold companies are a buying opportunity at these prices, said analysts.
”You want to buy the dips aggressively because of the strong fundamentals. Gold stocks have good moves to the upside and you want to be overweight here,” said Dudas.
Leveraged for growth
Investors will best profit from a rally in gold prices by holding stakes in miners that have not hedged future sales and those with mines that are profitable now that bullion is near three-year highs.
Of the big gold miners, Denver’s Newmont Mining is best suited to benefit from the price rally because of its policy of not locking in future sales at set prices, said analysts.
Medium-size miners with low production costs and good reserves will also come out as winners, said fund managers and analysts. In this area, Li said he likes Goldcorp, Meridan Gold and Agnico-Eagle Mines Ltd.
But there are market watchers who doubt the rally’s staying power, saying share prices may have run past fundamentals. One concern is soft jewellery demand, which has fallen by about a fourth in the past five years, warns John Tumazos, an analyst at Prudential Securities.
Also, if the dollar strengthens, or gold prices slide, some producers may not be able to operate profitably, putting downward pressure on industry-wide share prices.
But, given political and economic uncertainties, gold stocks remain a safe haven for worried investors, said analysts.
”Considering how fast and furious gold has moved this year, the recent correction out of gold stocks last week was not surprising,” said Brian Christie, an analyst at Toronto-based Canaccord Capital.
”But the problem is there are no other places for this hot money to go to. Gold is still the place to be.” – Reuters