Shares in mining companies look more attractive than gold for investors aiming to hedge their portfolios against inflation, according to analysts’ forecasts.
Barrick Gold, IAM Gold and other miners may rise by as much as 20 to 30 per cent in the next year if equity markets manage to stay on course, analysts say. By contrast, the upside in the price of the yellow metal, which hit $1,043 a troy ounce yesterday, is a further 10 per cent, according to their models.
“We’re more keen on gold equities,” says Bradley George, co-manager of Investec’s Enhanced Natural Resources fund. “There’s a rising gold price and that helps top-line growth as companies will report higher volumes. There’s also been a stabilisation in the cost of their labour and equipment.”
TD Waterhouse, the UK broker, reported that three mining stocks – Xstrata, Beacon Hill and Kazakhmys (all trading at roughly 16 times next year’s earnings) – appeared on its list of retail investors’ ten most popular buys this week.
Such reports suggest the sector continues to entice investors who are drawn by its eye-catching 110 per cent average rise in the last 12 months.
But even bullish managers admit that buying at current levels poses some risk as a correction in either the markets or the gold price could push gold equities down sharply.
In 2008, mining shares fell sharply in tandem with the market and lost about 40 per cent of their value on average in spite of a rising gold price.
So, wary of last year’s fall-out, some investors are postponing plans to buy into the sector. “I feel there may be an opportunity to buy them cheaper in the next six to nine months,” says one.
Metal prices also see sharp swings in volatility. But the price of physical gold would be less affected by a downturn in equities as its performance is only slightly correlated to the stock markets.
And there are still gold “bugs” out there who favour buying bullion coins, such as Krugerrands or tracking the metal’s spot price.
In its physical form, gold is useful as a currency hedge and to protect against further weakening of the US dollar in particular, enthusiasts argue.
The reasoning is that China and other emerging countries’ foreign exchange reserves are growing as their economies outpace those of the developed world.
At some point, these governments will look to diversify further into gold, says Ian Henderson, manager of JP Morgan’s natural resources fund.
Simple economic laws also suggest the gold price could rise higher. While its supply is shrinking, demand for it is mounting. Increases in production costs are also likely to push up prices.
There are several ways to gain exposure. One entry point is to buy via an exchange traded fund (ETF). The ETF Securities Physical Gold Fund tracks the price of gold, while ETF Securities Physical PPSG (Palladium, Platinum, Silver and Gold) Basket, allows investment in a wider portfolio of commodities.
Advisers with concerns about gold’s volatility, prefer buying into indexed- commodity ETFs, which track the prices of an even larger group of natural resources stocks and precious metals.
“Demand for gold rises in inflationary times, particularly when governments spend too much, but it has no means of generating a return and is worth only what another party will pay,” warns Jason Butler, a financial adviser at Bloomsbury.
A number of natural resources funds, offering consistently high returns, are also available.
BlackRock’s Gold & General Income fund is up 166 per cent in the last five years while First State’s Global Resources fund gained 161 per cent in the period, according to Morningstar.
Another way to gain exposure is via gold-backed certificates. The Perth Mint (www.perthmint.com.au) offers certificates backed by a guarantee from the Government of Western Australia. The minimum investment is $10,000.
