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A return to the gold rush for miners

After a year and a half of disappointing performance, gold miners may be about to turn the corner.

 
A return to the gold rush for miners

Gold mining shares, which are traditionally held as a geared play on the precious metal, have been serial underperformers over the past 18 months, but there are tentative signs that the tide is starting to turn, writes James Phillips.

While physical gold has delivered positive returns, albeit with considerable volatility over the past 12 months, up 6.6%, gold miners have lagged markedly. The FTSE Gold Mines index is down around 20% over the same period, although it put in a bit of recovery at the end of May and start of June.

 

‘There is no denying the performance of gold equities has been disappointing, to say the least, relative to physical gold prices over the past few years,’ says Neil Gregson, lead manager of the JPM Global Natural Resources fund.

‘The performance divergence has been particularly prominent since the beginning of 2011 and this trend seems to be continuing in 2012.’

Gold and miners: an evolving relationship

Looking back at the historical relationship between gold equities and the gold spot price, he says the latter started to trade on a premium in the 1980s due to improvements in gold processing technology.

This resulted in substantial growth in Australian and North American gold production, which resulted in considerable investor interest and the opening of dedicated gold funds. This theme continued throughout the 1990s, with gold shares trading at two to three times the value metrics of other mining companies.

At the same time, though, many gold companies started to hedge proportions of their gold production, which resulted in heavy losses from 2001 onwards as gold set off on its decade-long bull run, which turned off investors.

The role of gold ETFs

‘Along with stalling production growth and sharply increasing production costs, it was no surprise that gold exchange-traded funds (ETFs), often backed by gold bullion, seemed like a smarter alternative than gold equities to many investors,’ he said.

‘Today, total gold ETF assets have reached nearly $4,140 billion. Bullion support has also been very strong from central banks in recent years.

‘Against this backdrop, markets have seen the inflated gold mining shares multiples start to derate, and, in our opinion, excessively so since the financial crisis.

‘While we accept that gold shares are unlikely to regain the valuation premiums enjoyed in the past, simply because the industry is currently in a very different cycle, we do believe the devaluation relative to gold spot prices has largely run its course.’

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5 comments so far. Why not have your say?

sgjhaghsdg

Jul 03, 2012 at 07:56

Evy Hambro is nothing if not consistent. I held his fund a few years ago, and actually got out at a very small profit just before the long decline, and he always said the same thing about gold mining stocks due a rerating to match the price of physical gold. Of course, one day it might happen ...

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Hotrod

Jul 03, 2012 at 09:19

How do you "set" the price of physical gold? The twice daily London Spot Fix is supposed to do that, but in my opinion it is a pretty poor indicator in regard to mining stocks.

The record of three month forward contracts as traded on "COMEX" which is the bullion dealing desk of "NYMEX" shows just where the real action is. You can use the KITCO website to get a real-time data-stream.

However just over a year ago the COMEX was diverging from LONDON quite appreciably. So much so that the exchange increased its margin rate on these contracts from 10% to 20% The price of gold immediately slumped, and has now retreated from $1800/oz to $1600/oz

What is puzzling me is that: Stocks & Shares,Property, Commodities, and Precious Metals have all been moving in the same direction. i.e. South!

This is not normal and indicates to me just how short of liquidity the markets are. Something has got to give. At some stage more liquidity, (quantitative easing) must be injected.

Money printing is a bitter-sweet recipe. Get it wrong, (too much or too little) and the whole brew turns to vinegar. If this was to happen; gold would be the ultimate winner.

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Lost my marbles

Jul 03, 2012 at 13:10

I hope Hambro is correct.My substantial holdings in his fund have performed abysmally of late.

I remain disappointed.

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Goldman

Jul 08, 2012 at 13:50

Miners are hit badly and are now oversold. QE is US and UK should stimulate the rise as dollar & pound would fall

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douglas gordon

Jul 08, 2012 at 19:21

I agree with "sgjhaghsdg" and am in the same situation as "Lost my marbles" - I just hope "Goldman" is calling it correct - but that is a logical call and the markets have been anything but logical with respect to gold and gold miners for some time now

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