The price of gold might again be testing record highs, driven by investors seeking shelter from the financial blizzard, but shares in companies mining the precious metal now look a better bet.

With financial markets tumbling and currencies crumbling, investors have fled to gold as a traditional safe haven in times of trouble, and as a bulwark against the long-term inflationary effects of massive and various government stimulus packages and monetary easing by central banks.

However, there may not be much upside left in the yellow metal, as the appetite for jewellery, which accounted for nearly 60 percent of global gold demand last year, falls in step with the slowing global economy.

Shares in gold miners, however, have not kept up with the metal’s prices and should do well, despite the volatile stock markets, for investors with a high risk tolerance.

“You’re likely to have better performance in the equity, because it has lagged, and there is not much catalyst for the upside in the gold price itself,” said Bradley George, fund manager and head of global equity resources at Investec.

George said he expected gold to trade within a range of $930 to $1,050 an ounce, with the upper end capped by weaker jewellery demand and the downside supported by safety-first investors looking to preserve cash.

Spot gold, which traded at $939.85 an ounce on Thursday, has risen 40.6 percent in the last 18 months as the financial crisis has developed, including a 7 percent rise so far this year.

By contrast, the gold and silver index, which comprises major U.S. and Canadian gold mining stocks, has fallen 13.5 percent in that period, including a fall of 4.7 percent this year, and despite a surge of 83 percent over the last four months.

Frank Holmes, chief executive of fund manager U.S. Global Investors, expected companies with strong financial discipline and no hedging, such as Royal Gold and Randgold Resources , would outperform gold prices.

And that is despite the fact that Randgold is already sporting a one-year forward price-to-earnings ratio of 37.2, and Royal Gold is trading at 59.7 times, compared with the gold and silver index’s multiple of 24.1.

Investec’s George said he favoured gold producers that have their cost in a depreciating currency, such as those in South Africa, Australia and Canada.

He prefers AngloGold and Gold Fields, for example, and said Randgold and Yamana Gold looked interesting. According to Reuters data, AngloGold carries a forward P/E of 17.9 and Gold Fields’ stands at 21.


Ian Henderson, fund manager of JPMorgan Asset Management’s Global Natural Resources Fund, said stock selection was always the key.

“In recent years production costs have crept up, and for many growth has stalled. Investors have eschewed corporate risk, but ultimately you can’t get away from the linkage of gold mining shares to the gold price,” Henderson said.

However, he added gold miners’ shares had done well relative to other sectors, and that Canada’s Kinross Gold and Australia’s Newcrest Mining had outpaced the metal since the end of October 2008.

Production costs, mainly energy and steel, have come down for gold miners, helping boost their margins.

Among Henderson’s top picks of gold miners are Kinross, Lihir Gold, Barrick Gold, Newmont Mining, Kirkland Lake Gold, Peter Hambro Mining, Gammon Gold and Moto Goldmines.

U.S. Global Investors’ Holmes warned the volatility of gold mining shares was far greater than bullion, however, adding that for every 1 percent fall in the price of gold, gold miners’ shares would fall 3 percent. Holmes, who recommends investors hold 5 percent of their portfolio in bullion and another 5 percent in gold miners, also said the gold price could correct in the short-term but has the potential to rise to $1,500 an ounce.

UBS was also wary that a bear-market rally in equities could see a fall in the gold price, citing large, long gold positions on New York Mercantile Exchange’s COMEX.

But with the bleak economic outlook casting gold as an insurance policy for some time to come, many investors will want to keep up their premiums.

“If you are looking at more from a capital preservation point of view … then I would go into the gold commodity,” Investec’s George said.

“Whereas if you are looking for some actual performance and you are prepared to tolerate the risk and the volatility in the equity market, then I would look to some of these gold producers.” (Additional reporting by Atul Prakash, editing by Will Waterman)

(c) Reuters 2009. All rights reserved.