Time to bet money on gold mining stocks

March 01, 2009

Commodity Online
NEW DELHI: Has the world’s appetite for gold come to an end? Investors have started doubting the gold’s ability to further push ahead as the international gold prices started sliding this week. Once the metal was expected to cross Rs 20,000 per 10 gm in Indian market. But, that is not happening now.

Even as doubts over gold’s further rise being expressed by experts, there is one thing which is a sure bet for investors. Gold mining companies’ stocks have not gone up as fast as the gold prices. So there is still a lot of hope for gold mining companies’ stocks to make progress. So, experts advise that investors should try to put some money in gold mining stocks also.

Till, now, be it investments in gold exchange-traded funds (ETFs) or funds that invest in gold mining companies, investors have made huge profits.

While gold ETFs delivered their all-time high returns in the past three months, mutual fund schemes that invest in gold mining companies gave more than twice that return.

The spike in gold prices and lowering input cost has helped two funds, DSP Black Rock World Gold and AIG World Gold, deliver 78.19 per cent and 74.79 per cent returns respectively in the past three months.

When gold prices increase, it essentially means that the demand for gold has risen. In turn, this causes a rally in stocks of gold mining companies worldwide.

Share prices of gold mining companies appreciate at least twice the gold price, when the commodity rallies. But, that has not happened till now. That means there is still scope for these stocks to move up.

Apart from the spike in the price of gold, these funds also delivered due to lower inflation and deflation in some countries.

The lower prices have helped mining companies save cost on their operations.

With oil, labour and material becoming cheaper, their input cost has gone down, thereby improving operating cash flows.

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.

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

By contrast, the gold and silver index, which comprises major US and Canadian gold mining stocks, has fallen 13.5 per cent in that period, including a fall of 4.7 per cent in 2009, and despite a surge of 83 per cent over the last four months.

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