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Late last year, BRW’s sister publication, Financial Review Smart Investor, asked me to nominate two top investment ideas for 2012. I chose the ETFS Metal Securities Australia gold exchange-traded fund (ETF) and the gold producer Resolute Mining.
The logic was simple: the global economy would be a mess in 2012 and demand for havens such as gold bullion would rise.
I said at the time: “Get more exposure to gold bullion if you believe 2012 will be a repeat of 2011, or worse, as central banks worldwide print more money to stimulate economies.”
Right on cue, expectations are rising that the US Federal Reserve will signal a third round of quantitative easing to stimulate a disappointing US economy that is fizzling on the jobs front.
That would be good news for gold. Ultra-loose monetary policy worldwide is fuelling fears of further currency debasement and an outbreak of inflation in coming years.
Add to that more central bank buying of gold bullion and it is a safe bet that the precious metal has solid long-term support.
That does not mean it will zoom higher but talk that gold’s 10-year bull run is over is premature.
Nevertheless, punting on short-term moves in gold is a mug’s game. A better approach is to include a small exposure to gold – no more than 5 per cent for most investors – in portfolios to help diversification and add a more defensive element, and use an ETF.
I believed the Australian dollar was overvalued, so favoured the ASX-listed ETFS gold ETF, which is unhedged for currency movements.
Using an ETF that aims to match the return of physical gold bullion is much easier.
The ETFS gold ETF has risen from about $150 in early January to $160, thanks to a higher gold price and weaker Australian dollar.
Investors who want to eliminate currency risk – and gain pure gold bullion exposure – should consider the BetaShares gold bullion ETF, which has currency hedging. Returns from an unhedged gold ETF can be hurt if the Australian dollar rallies.
Investors who want more aggressive gold exposure should consider gold equities over gold bullion.
The S&P/ASX All Ordinaries Gold index (which is heavily influenced by the underperforming Newcrest Mining) has dropped 32 per cent in the year to May. A five-year annualised return for the index of just 2 per cent is remarkably low given strong gains in gold over that period.
Gold equities have lagged gold bullion for several reasons: global sharemarket weakness; a higher Australian dollar has dampened gold price gains for some producers; rising exploration and production costs; and earnings disappointments at sector leader Newcrest has weighed on sentiment towards gold stocks.
Watch for gold equities to make up lost ground when the sharemarket stabilises later this year and it becomes clearer that a higher gold price is here to stay and as analysts start factoring higher gold prices into valuation models. Some higher-quality gold stocks have simply fallen too far, too fast, this year. Resolute rallied from $1.70 in January to $2.21 in February, before slumping to $1.58.
It has the Golden Pride mine in Tanaznia, the Syama Mine in Mali and the Ravenswood goldmine in Queensland. Sharemarket weakness, poor sentiment towards gold stocks, some production issues at Golden Pride and a recent coup in Mali have hurt Resolute’s share price [it said operations had not been affected by Mali’s political instability].
There is a good chance the company will miss its production guidance of 410,000 ounces for 2011-12. It said in the latest quarterly activities report: “Resolute expects June-quarter performance to exceed that of the March quarter; however, achieving this guidance is now a stretch target.”
Even so, the latest share price sell-off looks overdone and it is no surprise that good judges, such as Citigroup, have a share price target of $2 for Resolute.
Another Africa-focused gold stock, Perseus Mining, is also worth watching. Shares in the emerging producer, a column favourite, have slumped from a 52-week high of $4.05 to $2.72, in line with huge share price falls in several other West African gold stocks this year. Macquarie Group has an “outperform” recommendation on Perseus and a target share price of $3.50.
Macquarie also favours Gryphon Minerals, another promising West Africa explorer that has been dumped this year. The broker’s target share price for Gryphon is $1.90; the current price is 72¢. Gryphon has a 2 million ounce gold resource and is advancing the Banfora gold project in Burkina Faso.
Although value in Resolute, Perseus and Gryphon has improved considerably, there is no rush to buy them or any other gold stock during a sharemarket correction.
Contrarian investors who are comfortable with higher risk might snap these stocks up at lower prices; others might wait until the sharemarket steadies and gold equities start to narrow their performance gap to the higher gold price, which looks likely to stay for some time.