S&P Capital IQ has a positive outlook for gold and gold-related investments for 2012.
Even though the price of gold has risen steadily over the past decade reaching its highest average level ever in 2011, we believe gold will rise further 2012, for five reasons. We also look at a trio of gold stocks and two ETFs.
First, the Federal Reserve is committed to keeping short-term interest rates near zero through 2014, so we see no opportunity cost for buying and holding gold anytime soon. Low short-term interest rates reduce the opportunity cost of owning gold.
Second, despite higher gold prices, global mine production has been stagnant for more than a decade.
According to data compiled by Gold Fields Minerals Service, a U.K.-based metals consulting firm, global mine output of gold totaled 2,809 tons in 2011, only 8% more than the 2,602 tons mined 1999.
We believe production will be stagnant for the next several years as well, as old mines are becoming depleted and are not being replaced to the extent needed to significantly lift output.
Third, we expect that greater volatility in the world�s major currencies will increase demand for gold as a monetary reserve asset.
We also believe that China and other countries that hold a large portion of their foreign exchange reserves in U.S. dollars will ultimately diversify their assets out of the dollar and into gold.
Also, we think that gold will rise in all currencies due to the implementation of quantitative easing policies by central banks worldwide.
Fourth, we think that gold demand will benefit from ever increasing concerns about the credit quality of international sovereign debt. In our view, the threat of sovereign debt defaults increases the appeal of gold as a safe haven.
Finally, we believe that strong growth in the U.S. monetary base and the M-2 money supply will the catalyst for a further rise in the price of gold later this year due to increased concerns regarding inflation.
We note that the monetary base rose by 29% in 2011 while the M-2 money supply expanded by 9.4%. More recently, the monetary base was up 23.3% year over year through February 24, while the M-2 money supply was up 10.2% year over year through February 13.
Based on our expectation for a further rise in the gold price in 2012, we look for another sizable gain in earnings for the three gold companies that we follow: Randgold Resources (GOLD), Newmont Mining (NEM) and Barrick Gold (ABX).
For the group in aggregate, we forecast earnings-per- share growth of 40% in 2012 over 2011, with the bulk of the projected gain coming from Randgold Resources. Aggregate earnings for this group soared 57% in 2011.
Following a 10% rise in 2011, to $1,564 per oz. and a 13% advance through late February, we believe that gold will trade in a sideways pattern for the balance of 2012 before ending the year at $1,900 per oz, up about 21%.
For investors seeking to own gold stocks through an ETF, we think one of the best ways is through the Market Vectors Gold Miners (GDX).
The fund holds 31 gold and silver stocks in its portfolio, including three covered by S&P Capital IQ equity analysts. The holdings in GDX are a blend of large-cap, more slowly growing senior gold producers and faster-growing, mid- cap and small-cap producers.
Investors interested in a more aggressive approach to gold stocks might consider the Market Vectors Junior Gold Miners (GDXJ). The fund has assets of $2.5 billion. Its holdings consist of a total of 81 small and medium-cap gold and silver mining companies.
In contrast to the more established producing companies in GDX, many of the companies held by GDXJ are early-stage exploration companies with little or no production and limited access to financing.
Consequently, this ETF tends to be more volatile and could be especially vulnerable to a downturn in the gold price, in our view.
At the same time, GDXJ would be expected to outperform GDX in a rapidly rising gold price environment, by our analysis.
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