Getting noticed28 Jul 2011 02:58
Analysts at Investec believe that there is no reason that sentiment will change on the gold price, as the yellow metal continues its 10-year bull run.
That being said, however, Investec also points out that some of London’s biggest gold stocks have actually underperformed the gold price.
Crucially the City firm is the latest broker to pick up on this value gap over the past week or so, following similar observations by Bank of America Merrill Lynch and London’s Ambrian Capital in recent days.
Zooming in on specific stocks Investec analysts Hunter Hillcoat and Mark Heyhoe gave ‘buy’ recommendations to a number of gold miners that have not been hitting the mark operationally, but are now expected to catch up.
“While gold companies are likely to remain under pressure to contain operating and capital costs, we do believe that the underperformance of the gold equities has been exaggerated by temporary issues faced in 2010 and into 2011, and that with these issues largely resolved or being resolved, we should see a catch-up outperformance by the equities,” the analysts said in a note to clients.
Investec has now restarted its coverage on Randgold Resources (LON:RRS), African Barrick Gold (LON:ABG), European Goldfields (LON:EGU) and Centamin Egypt (LON:CEY).
The analysts added: “We have a positive outlook on all companies, but stress that each company offers its own particular attraction to investors. In an overall investment attractiveness sense, Randgold and African Barrick are our preferred picks.”
Last week, in a detailed research note, Merrill’s analysts looked at the mismatch between the performance of gold stocks and bullion, which keeps treading new territory and making new highs above US$1600 an ounce.
The analysts insist that strong gold prices are not an indication of a ‘bullion bubble’, especially when considered relative to other commodities and financial assets. According to Merrill, the gold equity de-rating is partly due to the fact that, following large price gains in recent years, investors remain concerned about the long-term direction of gold prices.
The American broker however believes that bullion prices are sustainable between $1,500-2,000 an ounce in the medium term.
Like Investec, Merrill said there is ‘compelling scope’ for catch up trade for a number of gold plays. Its favourite ‘buys’ are Centamin, Petropavlovsk (LON:POG), African Barrick, Randgold, and European Goldfields.
Meanwhile looking at some of the juniors Ambrian Capital mining analyst Duncan Hughes blames political instability combined with a general aversion to equities as another reason for the disconnect.
Ambrian told its clients that while exchange traded funds (ETFs) are one good way to benefit from the surge in the gold price, it believes there is also a strong case for buying quality gold firms.
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