LONDON (Reuters) - Investors in major gold producers may enjoy some long-overdue gains next year as companies hope to cash in on the precious metal’s ability to sustain historically high price levels.
Gold’s pullback from record highs above $1,225 an ounce this month is seen by some analysts as a key stage in its longer-term uptrend. Sustained price gains are likely to be supportive for miners in a way occasional forays to record highs have not been.
“Once prices stabilize, whether it’s at $1,000 or $1,100, you will find significant buying coming back to the gold equity market,” said RBC Capital Markets analyst Leon Esterhuizen.
“I would expect people to buy the equities up to the gold price level at that time, because then you are basically gearing up for the next run.”
General pricing levels for gold equities were at least $200-300 behind spot prices when the metal was trading around $1,200 an ounce in anticipation of a pullback, Esterhuizen said.
Gold has fallen more than 9 percent after surging last month on the back of central bank buying and dollar weakness, fuelling hopes the metal may be building a base at higher levels.
Most major gold miners have underperformed 2009’s 27 percent rise in bullion prices. Strong local currencies have raised costs for many, outweighing the impact of higher metal prices.
South Africa’s Harmony Gold, the fifth-largest gold miner, is the biggest underperformer of the world’s top 10 gold producers. Its shares have dropped 19 percent this year, mainly due to the strong rand.
“Gold companies have been bad at forecasting production and costs,” said Theresa Gusman, global head of commodities at DB Advisors, the asset management subsidiary of Deutsche Bank.
“As production has fallen short of expectations and costs have continued to increase, it has been very good for the gold price - but for stock prices it has been bad.”
For graphic showing the relative performance of selected gold miners and bullion, click on: here
Russia’s biggest gold miner Polyus Gold was the only top 10 producer to outperform bullion. Its shares more than doubled helped by rouble depreciation, resolution of a shareholder conflict and good growth prospects.
“It’s the company with the largest organic growth profile among the major and mid-sized gold miners,” said Vladimir Zhukov, metals analyst at Nomura Research in Moscow.
Gold companies historically have not been good at delivering returns on capital compared with, say, copper producers, but analysts say majors such as AngloGold Ashanti, Newmont and Barrick may soon be delivering greater returns.
Some miners, such as Barrick, struggled to capitalize on rising prices due to unfavorable hedging deals.
AngloGold and Barrick have announced the closure of their hedging programs, under which they sell future production at agreed prices, and major producers are not expected to resume hedging even at high metal prices.
JP Morgan said it expects its South African gold share picks to outperform gold prices in the next six months. “We see upside in the rand gold price and in our South African gold share picks despite the challenging near term operating environment.”
Its top picks are AngloGold and Gold Fields the world’s third- and fourth-biggest gold miners.
Kate Ward, an analyst at Westhouse which mainly advises companies on London’s junior AIM market, said she prefers gold equities to bullion as an investment, citing organic growth projects and takeover premiums as well as higher metal prices.
Going into 2010, a lot will depend on the outlook for the gold price. If bullion prices manage to stabilize at elevated levels, mining equities are likely to find significant support.
A poll of 34 analysts conducted by Reuters this month showed all saw the precious metal ending 2009 above $1,000 an ounce, and many predict prices will stay firm in 2010.
HSBC lifted its 2010 gold price forecast to $1,150 an ounce earlier this month, citing interest in the metal as an inflation and currency hedge. Bank of America Merrill Lynch also said it sees gold at an average $1,110 next year.
“We are not forecasting significant further gains from here into the first quarter, but also we don’t foresee a massive relapse,” said Daniel Major at RBS Global Banking & Markets.
“There are still fears of a spike in inflation in the background, as well as further uncertainty over the state of the economic recovery, which will likely keep marginal investors that believe in the gold story interested.”
Additional reporting by Robin Paxton in Moscow and Maytaal Angel in London; editing by William Hardy