Disparity between equities and gold creates buying opportunity
Monday 15th August 2011
With gold reaching new highs as investors seek a safe-haven, the recent sell-off in global equities has widened the dislocation between gold mining equities and the bullion price, says Angelos Damaskos, CEO at Sector Investment Managers and fund adviser to the Junior Gold Fund.
Damaskos believes that gold shares currently discount a long-term price of about US$ 1,000/oz, which, given the strength of gold, cannot go on forever.
The rise in the gold price can have a meaningful impact on mining companies’ profitability and therefore provide an investor with a buying opportunity.
For example, Damaskos points to Focus Minerals, an Australian gold miner, which has announced it is on target to produce 130,000 ounces (oz) from its existing operations in the next twelve months. It is also about to conclude a merger with Crescent Gold. At 230,000 oz combined production, each US$ 100/oz change in the gold price would result in a US$ 23 million increase in annual profits.
“The merger would change the company’s status to the mid-tier producers category, which should lead to a re-rating of its enterprise value,” said Damaskos.
“We believe that the current weakness in gold shares is a temporary phenomenon and it will be a matter of time before a better balance is restored.”
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