Miners to Out Pace AuGold stocks to outsparkle gold in post-QE2 world
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Gold’s performance has eclipsed that ofgold mining stocks this year, but gold equities now are likely to takethe upper hand as the flow of cheap U.S. cash slows and miners boastjuicy margins and good growth prospects.
Gold’s status as a quasi-currency andsafe haven has helped pushed the price of the metal up about 20 percentsince the start of the year to above $1,520 an ounce, making it one ofthe top performing asset classes of 2011.
That compares with an 8 percent drop inthe ARCA Gold Bugs index, which includes shares in some of the world’slargest gold miners.
The U.S. Federal Reserve’s $600 billionbond-buying programme, which has kept down interest rates and thedollar; the disaster in Japan and the violence in the Middle East,which have shaken investor confidence; and evidence of sluggish U.S.growth and concerns about China have all boosted gold but dented globalstocks. And gold shares have not been immune.
Now that the Fed’s easing programme hascome to an end, Japan is recovering and China has managed to stave offsome of the biggest fears about price pressures, there is some doubtthat gold can keep up that strong performance.
Gold stocks, meanwhile, are supported bya gold price near record highs and may benefit from improvingsentiment for equities markets. They also appear relatively cheap atthe price.
Catherine Raw, who helps manageBlackRock’s $4.7 billion Gold & General Fund, said the rise in thegold price has outpaced cost inflation in the industry, meaning thatgold miners are likely to see their margins and their profits increasethis year.
“I, as an investor, would say that inthe end,given thatI believe the world isn’t going to collapse, whiletheremaybea good few months of volatility left, if you’re prepared tobe patient, then I would see now as a very good buying opportunity,”she said.
“The fundamentals of gold companies haveimproved, and yet their shares have fallen, and you’ve seen valuationsnow much more comparable to the rest of the mining sector. So you’renot having to pay a ridiculous premium as you would have done say fiveor six years ago, and yet margins are growing significantly, in a waythat they weren’t five or six years ago,” Raw added.
Shares in Barrick Gold, the world’slargest gold miner, trade at nearly 14 times anticipated earnings,while second-largest Newmont and third-largest AngloGold Ashanti tradeat roughly 12 times expected earnings.
This compares with base metal producerBHP Billiton, which trades at nearly 17 times expected earnings, orAnglo American, which trades at 40 times earnings.
HSBC Global Asset Management, whichrecently unloaded most of its holdings of physical gold in favour ofgold shares, said gold equities are two-thirds shares and one-thirdgold price.
An environment of uncertainty, negativereal interest rates and turbulent stock markets will cause goldequities to underperform, even while they benefit from a rise in thegold price, HSBC said.
Historically, gold has outperformed goldmining shares in times of financial market stress and instability. TheARCA Gold Bugs fell by 29 percent in 2008, the low-point of the globalfinancial crisis, while the gold price rose by 6.05 pct. The indexfell 44 percent in 2000, when the dot.com bubble burst, while spot goldfell by just 6.3 pct in that time.
But over the past 10 years while goldhas been consistently rising, for a gain of over 400 percent, the GoldBugs index has risen by 770 percent.
Daniel Sacks, who co-manages Investec’s$750 million Global Gold Fund, said gold miners are generally lookingmuch healthier than they did in 2008, because many have issued equityto cancel out debt.
He added that gold miners, as a rule,tend to avoid taking on debt as their lenders encourage them to hedgetheir future production as some form of guarantee.
“They still don’t compare tohigh-yielding industrial or financial stocks, but compared to theirhistory, gold shares are yielding a lot more than they used to. It’sjust an indication of the width of their margins,” Sacks said.
Sacks said gold equities tend tooutperform in the northern hemisphere summer months, largely because ofthe lull in consumer buying of physical gold. This was not the caselast year when the eruption of the euro zone debt crisis prompted aninvestor push into gold and out of equities.
In summer 2009, however, gold rose 7.7percent compared with a 31 pct rise in the Gold Bugs index. In 2007, asthe extent of the credit crunch was becoming apparent, gold rose 12.6pct between June and September, while gold stocks gained 18 percent.
“After a rip-roaring 2010 as the metalwent mainstream, gold has become the gift that has stopped giving forsome investors,” said JPMorgan Chase in a recent note. “We feel goldstill has a very significant role in portfolios. However, it has becomeapparent that the metal and the equities act differently.”
The U.S. bank added, “Gold equities willremain under pressure while investors remain fearful. Once investorsfeel that the risk of another leg down in general markets passes, orafter a downswing in the markets, we feel the gold equities will dosome catching up.”