Have gold and gold miners turned a corner?

8th August 2013

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Following gold’s deepest decline for the past two decades, some are now hopeful for a recovery in the precious metal as miners enjoy a rebound during July writes Philip Scott.

For 93 weeks to the end of June 2013, bullion endured its longest and deepest downturn in the 20 years, shedding a massive 37 per cent of its value since reaching an all-time high of $1,927/oz in September 2011. Currently the metal is trading at circa $1,287 per ounce.

The fall was much steeper and longer that the previous three major corrections in gold’s 12-year bull market, and certainly unnerved most investors who believe in the safe-haven value of the metal.

As the US economy has gradually improved the US dollar, following a prolonged period of weakness, has gathered strength which in turn has taken the shine off gold, a traditional hedge against the greenback and inflation. But alongside the recovery, lower demand from China, the world’s second largest economy and the potential end of the US’s massive stimulus programme, its so-called quantitative easing measures, have also played their part.

Earlier this year, in April, gold suffered its biggest sell-off in more than three decades, taking some $1trn off the value of reserves, when investment banking giant, Goldman Sachs, cut its long-term forecast for the precious metal.

But according to Angelos Damaskos, CEO of Sector Investment Managers and fund adviser to the Junior Gold fund, there are now certain indicators that point to recovery which could be just as sharp and significant as the fall.

He says: “Gold mining shares, which have been in a vicious bear market for two years now, rebounded strongly in July.  This first phase of recovery may be driven by shorts-covering and bottom-fishing speculative positions, nevertheless, given the strength of the moves, it would appear that the equities now discount a recovery in the gold price.”

Among the best performers in the Junior Gold fund, in July were Osisko Mining and Endeavour Mining.

Elsewhere FTSE 100 listed mining giant Randgold Resources announced its second quarter results this week, which showed that increased production and reduced costs should enable it to remain profitable in the face of decreased gold prices.

ETF Securities, an exchange traded fund provider recently declared that the negative sentiment towards the yellow metal has been overdone. Head of research and strategy Nicholas Brooks at the firm says: “On our estimates, gold, silver and platinum, with implications for palladium, are now trading around 20 per cent, 10 per cent and 25 per cent below their respective average marginal costs of production. Prices will have to move above these levels to support long-term supply growth.”

For his part Adrian Lowcock, senior investment manager at fund broker, Hargreaves Lansdown, says that while gold and mining stocks have enjoyed a rebound recently, the latter set are still a long way off before they get back to more efficient and profitable levels.

He says: “Gold in many ways is an insurance or hedge against inflation. While there are no real catalysts on the horizon right now, the trigger for a turnaround in gold will be if and when inflation raises its head.”

For his part, Lowcock recommends that investors looking for exposure to gold mining stocks look to the BlackRock Gold & General fund, and for those looking for something more defensive, he cites the Troy Trojan fund. For a passive play, investor could opt for a gold ETF, which just tracks the price of gold.

>>>Read Mindful Money’s interview with BlackRock Gold & General fund manager Evy Hambro here.

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