Shares set to perform better than gold price
CHARLOTTE MATHEWS Published: 2009/06/26 07:05:34 AM
GOLD companies’ share prices may return to the era when they outperformed the gold price as falling operating costs push up profit margins, according to GFMS World Gold MD Paul Burton.
Burton, writing in the independent metals consultancy’s latest newsletter, said gold shares had underperformed the gold price for most of the past five years, although traditionally they had offered leverage to the gold price.
They did show some leverage late last year when equity markets collapsed, but this was negative because the relative liquidity of large listed gold companies made them among the first investments to be sold by investors seeking cash, so miners’ share prices fell faster and further than the bullion price.
Over the past five years, gold shares underperformed the gold price because of the dramatic increases in operating costs, Burton said. Labour, inputs and power prices all soared, pushing up cash costs by about 25% a year.
But since last year, cash costs had been falling. In the fourth quarter of last year they averaged 439/oz and in the first quarter of this year fell to 432/oz.
That meant average margins for gold companies in the first quarter, when the average spot gold price was around 909/oz, was about 477/oz.
GFMS chairman Philip Klapwijk said gold investment demand was expected to rise greatly in the second half of this year and would carry the gold price to new peaks.
Demand from investors in Europe and North America would be driven by increasing fears of long-term inflation in western economies.
But London-based Numis Securities said in its latest report on metals markets that holdings in the SPDR exchange-traded fund, the largest of its kind, had remained static since March.
Numis expected this would push the gold price down towards 900/oz. It said gold seemed to be responding mainly to exchange rate fluctuations and conflicting data about the performance of the world’s major economies was depressing price gains.
Gold was trading firmer at 935/oz yesterday after the US Federal Reserve said target interest rates were unchanged, boosting gold’s appeal as an alternative investment to US treasury bills.
businessday.co.za |
