“It appears”, says Numis Securities, “that $700-$800/oz is the new $500-$600/oz”. The broker is referring to the sharp increase of the cost of gold mining that has taken place in the last year or two. In its latest review of the sector, Numis urges investors to “stick with gold” – despite giving plenty of reasons for doing the opposite.
As we move into 2013, gold bulls are getting anxious. Depending upon your interpretation of charts, the price is either consolidating around the 1,600/oz level ahead of a renewed advance or else the ten-year bull-run has decisively faltered. Ahead of the Indaba Mining Conference in Cape Town this week, another broker to broadcast on the sector is Edison Investment Research. It begins by pointing out that the last two years have been two of the worst for the gold price since 2001 and asks “is the gold bull market drawing to a close?”
The answer “is an emphatic no”, says Edison. Until governments show a real determination to fight inflation and preserve the value of paper currencies it thinks that the gold price will continue to rise, albeit at a more subdued rate.
But both of these brokers give several reasons for caution. The gold price was supposed to “power to $2,000/oz” following the US’s quantitative easing programme last autumn. It did not happen. Investment demand has been falling. Other asset classes are starting to deliver better returns. Governments around the world have started to confront their budgetary problems. And as the global economy continues its recovery from the financial crisis, the need for a safe haven is not so urgent.
Driven by sentiment or fundamentals?
The brokers acknowledge these factors. But with several gold miners amongst their clients, they are hardly likely to declare themselves outright bearish. And yet Edison says that “the years of exceptional returns may be behind us”. Numis kicks the can down the road saying that “we need a prolonged period of sustainable growth to become bullish about the economy and we are yet to experience this”. But it cuts its predicted 2013 gold price by 7% to $1,775, while maintaining a long-term price target of only $1,300.
Numis also observes that “gold is a fickle beast and driven by sentiment far more than fundamentals these days”. I am not sure that I agree with this. Given that most gold ends up in underground vaults, sentiment has always been paramount. And the idea that this sentiment is fickle is undermined by a price chart that shows a really quite smooth bull-market progression from 2001, followed by a period of consolidation in a narrow range.
Anyway, being of rational and sound mind, I have never been a big fan of gold. But that does not mean that I would not invest in a gold mine if it made good money. That, though, has not been as easy as you might think. The shares of gold miners have lagged behind the actual gold price, thanks to a combination of those rising costs, political and labour hostility, operational delays and the mining of lower quality ore grades that only make sense at a high gold price.
2013 could be a good year for gold shares
While Numis warns that Guinea, Tanzania, Cote d’Ivoire, the DRC and Zimbabwe may yet have nasty surprises in store for the miners, these headwinds may be easing off. It offers a number of buy recommendations including, amongst the smaller players: Centamin Egypt (CEY), Avocet Mining (AVM) and Highland Gold (HGM).
Selectively then, 2013 could be a good year for gold shares. But the big picture is surely of a world slowly returning to economic health and growth, a context that favours industrial metals over the safe-haven status of gold.
Amongst these industrial metals, my favourites are the select group, including cobalt, tantalum and rare earths, that are on EU and US government lists of critical raw materials. That in itself tells you that the supply/demand picture should be in favour of producers and the Red Hot portfolio already contains two junior miners of these critical raw materials that are both showing nice gains. If you are not yet a Red Hot subscriber, you can sign up for a no obligation 90-day trial.
• This article is taken from Tom Bulford’s free twice-weekly small-cap investment email The Penny Sleuth. Sign up to The Penny Sleuth here.
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