Shares in commodities companies, particularly gold, are poised for a re-rating this year and are currently trading at attractive valuations, according to Malcolm Smith, Director at BlackRock’s Natural Resources Team.
Smith highlighted disconnect between gold bullion’s headline grabbing performance and the lacklustre performance of gold shares in 2011. In the past three years gold companies’ margins have increased by 219 per cent and gold bullion has appreciated by 114 per cent, but in comparison gold equities have risen only by 50 per cent, illustrating there is a mismatch between the position of gold companies and share prices.
“Gold equities underperformed gold bullion last year, but the fundamentals make for a different story,” Smith said.
“The equity market as a whole was depressed throughout 2011, but mining companies are showing healthy earnings and cash generation, which in turn may lead to an increase in dividends for investors. Gold shares are currently looking cheap relative to the price of bullion and there are definite buying opportunities to be had. A similar discount opened up in 2008 and investors, who spotted this opportunity then, were handsomely rewarded during the following year.”
Smith also believes that the fundamentals are encouraging for gold prices to continue at current high levels. Demand and supply indicators are still positive for the price of gold.
“We are seeing an increased demand from central banks, which in the last couple of years have reversed their trend of selling bullion. Data from Q3 2011 showed that they had purchased 349 tonnes, a 350 per cent increase from 2010 levels and surpassing market expectations. Interestingly, demand has been driven by emerging markets, in particular Russia, Mexico, Thailand and South Korea, who are buying physical gold as an alternative currency and as they look to diversify away from the US Dollar,” Smith added.
“In addition to this, consumers are buying gold to protect their purchasing power in an environment of high inflation and low interest rates. This is being seen in areas such as China, where investment demand was up 90 per cent in H1 2011 to 138 tonnes.
“On the supply side, the fundamentals are encouraging,” Smith added.
“The gold price has increased 400 per cent since 2001, while the amount of gold produced by the mining sector has remained somewhat muted by comparison. The low hanging fruit has largely been picked and gold is becoming increasingly harder to mine. In this environment when demand is strong and supply is flat, we fully anticipate the positive outlook for the price of bullion to continue, coupled with the re-rating of gold equities as we start 2012.”