Denver (Kitco News) - Gold-mining stocks are likely to outperform gold itself if the metal returns to a rising price environment, said fund managers and mining analysts attending the Denver Gold Forum.
Historically, this has been the case. But there was a spell during gold’s long bull run when the metal was outpacing mining shares.
Fund managers and mining analysts at the Gold Forum were generally upbeat about the precious metal’s picture for the longer term (see related story). They suggested investors’ willingness to take on more risky assets in general, coupled with the cost-cutting efforts of miners, are likely to give share prices the upper hand.
“Lately, what I am seeing is whenever gold goes up a percent or two, mining stocks are going up anywhere from 5% to 20%,” said Dan Hrushewsky, senior analyst for gold-mining equities with Jennings Capital. “I’m starting to see a high sensitivity or beta of mining stocks to gold prices.
“It looks to me like the mining stocks want to move. So if the gold price goes up, mining stocks will outperform.”
Dan Denbow, assistant vice president of equity portfolios at USAA Investments and manager of the USAA Precious Metals and Minerals Fund, cited efforts by companies to scale back overall spending, seeking to improve cash flow and profitability. Previously, some felt producers were too focused on simply ramping up output during a long-running bull market before prices fell this year.
“They have taken a serious tone towards costs and managing operations,” Denbow said. “As you meet with different companies, not all of them have taken it to heart. But a good many have taken it to heart.”
The hope is this will start being reflected in the next couple of quarterly earnings reports, he said. Additionally, mining operations in some nations have gotten a benefit from a softer local currency against the U.S. dollar, since they are paid for their gold in U.S. dollars but then pay their expenses in their local currency. Should upside earnings surprises start occurring, this would encourage more stock investors to re-enter the mining sector, Denbow said.
Further, investors are willing to take on more risk again, Hrushewsky explained. Much of this is cyclical in nature, he added.
“The risk trade has been off for so long that people want to get back into riskier assets. It’s as simple as that,” he said. “These things go in cycles….It’s much like the economy is cyclical and commodity prices are cyclical. Risk appetite is cyclical.”
The Dow Jones Industrial Average and S&P 500 index have hit record highs this year.
Mining stocks have shown some signs of recovery, after getting hit earlier in the year as gold prices fell. The American Stock Exchange Gold Bugs Index (HUI) finished Tuesday at 229.52, up from its summer low of 206.87. Shares of Barrick Gold Corp. (NYSE:ABX) (TSX:ABX), the world’s largest producer, finished Tuesday at $18.56, compared to the summer low of $13.76.
Thomas Winmill, president of Midas Management Corp., also looks to mining stocks to outperform gold.
“We still think there is a lot of value to be obtained … for equity prices to go back to prior historical levels in terms of price to cash flow, price to net asset value, price to reserves in the ground, proven and probable,” Winmill said. “I think the mining companies seem to be making the right noises with respect to return on capital.”
There is an old market adage to buy low and sell high.
“I think right now, the equities are low. I think they’ll go higher (relative) to the gold price in the future. At Midas, we are sticking to our guns that mining equities should outperform the gold price in a rising gold-price environment.”
By Allen Sykora of Kitco News email@example.com