If anyone tells you they know where the gold price will go, you should take it with a big grain of salt, but Under the Radar thinks that there are opportunities to make big money in the sector.
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Those opportunities come in the form of gold producers, which have been busy reducing their costs and focusing on higher grade deposits. The good ones aren’t easy to find, but we think it’s worth your while to buy three or four if you can.
After all, it’s worked well in the past 12 months. Two gold producers which have more than doubled were our favourites Northern Star (NST) and Aurelia Metals (AMI). Others to perform well include OceanaGold (OGC), Metals X (MLX) and the West African developer Papillon Resources (PIR), which is subject to a takeover offer from a Canadian company.
Gold delivers zero return and has limited productive purpose, but is the one true hedge against general misfortune. It has proven this trait throughout history.
It is the demand and supply factors which we like about the gold price. At the other end of the scale, it is the value that can be found in some companies, if you dig hard enough.
As the above returns illustrate, gold miners are leveraged like never before to an appreciating gold price, which currently sits at US$1300 an ounce.
The analysis below comes from one of our columnists, the fund manager, Andrew Brown.
On the supply demand side of things, the spike to above US$1900 an ounce in September 2011 was largely due to major gold exchange traded fund (ETF) vehicles buying through inflows.
The largest, the SPDR Gold Shares (NYSE: GLD) owned its peak holding of just under 44 million ounces in late 2011. A year later, that was down to 25 million.
This fall is the equivalent of about a fifth of annual global gold production. Over the past six months, GLD’s holding of bullion has moved within less than a million ounce range of 25.5 million ounces.
If we are prepared to assume a gold price of around US$1200, which is a discount to the current price of US$1300, and an exchange rate of A$0.95 to US$1.00, a number of Australian gold companies should make respectable profits.
These include eight mid-cap gold producers, which should mine close to 2 million ounces this year and have average cash-costs US$1150 an ounce. Moreover, these costs should fall to just above US$1000 in fiscal 2015 as cost cutting measures and mine closures kick in.
We admit that there are big risks in any gold producer that you care to name, but if you invest in a few of them, we believe that there is a good chance you’ll hit pay dirt.
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