London - Gold's performance has eclipsed that of gold mining
stocks this year, but gold equities now are likely to take the upper hand as
the flow of cheap US cash slows and miners boast juicy margins and good growth
Gold's status as a quasi-currency and safe haven has helped
push 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 US Federal Reserve's $600bn bond-buying programme, which
has kept down interest rates and the dollar; the disaster in Japan and the
violence in the Middle East, which have shaken investor confidence; and
evidence of sluggish US 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 programme 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
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 at the price.
Catherine Raw, who helps manage BlackRock's $4.7bn 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.
"I, as an investor, would say that in the end, given
that believe the world isn't going to collapse, while there maybe a good few
months of volatility left, 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 said.
Shares in Barrick Gold, the world's largest gold miner,
trade at nearly 14 times anticipated earnings, while second-largest Newmont and
third-largest AngloGold Ashanti [JSE:ANG] trade at roughly 12 times expected earnings.
This compares with base metal producer BHP Billiton [JSE:BIL], which
trades at nearly 17 times expected earnings, or Anglo American [JSE:AGL], which trades at
40 times earnings.
HSBC Global Asset Management, which recently unloaded most
of its holdings of physical gold in favour of gold shares, said gold equities
are two-thirds shares and one-third gold price.
An environment of uncertainty, negative real interest rates
and turbulent stock markets will cause gold equities to underperform, even
while they benefit from a rise in the gold price, HSBC said.
Historically, gold has outperformed gold mining shares in
times of financial market stress and instability. The ARCA Gold Bugs fell by
29% in 2008, the low point of the global financial crisis, while the gold price
rose by 6.05%.
The index fell 44% in 2000, when the dot.com bubble burst,
while spot gold fell by just 6.3% in that time.
But over the past 10 years while gold has been consistently
rising, for a gain of over 400%, the Gold Bugs index has risen by 770%.
Daniel Sacks, who co-manages Investec's $750m Global Gold
Fund, said gold miners are generally looking much healthier than they did in
2008, because many have issued equity to cancel out debt.
He added that gold miners, as a rule, tend to avoid taking
on debt as their lenders encourage them to hedge their future production as
some form of guarantee.
"They still don't compare to high-yielding industrial
or financial stocks, but compared to their history, gold shares are yielding a
lot more than they used to. It's just an indication of the width of their
margins," Sacks said.
Sacks said gold equities tend to outperform in the northern
hemisphere summer months, largely because of the lull in consumer buying of
physical gold. This was not the case last year when the eruption of the eurozone debt crisis prompted an investor push into gold and out of equities.
In summer 2009, however, gold rose 7.7% compared with a 31%
rise in the Gold Bugs index. In 2007, as the extent of the credit crunch was
becoming apparent, gold rose 12.6% between June and September, while gold
stocks gained 18%.
"After a rip-roaring 2010 as the metal went mainstream,
gold has become the gift that has stopped giving for some investors," said
JPMorgan Chase in a recent note. "We feel gold still has a very
significant role in portfolios. However, it has become apparent that the metal
and the equities act differently."
The US bank said: "Gold equities will remain under
pressure while investors remain fearful. Once investors feel that the risk of
another leg down in general markets passes, or after a downswing in the
markets, we feel the gold equities will do some catching up."