[miningmx.com] — Gold may rise as high as $1 400 an ounce in 2010 as investors buy the metal as both a safe store of value and a haven from risk amid rising fears over sovereign debt, a co-portfolio manager of the Investec Global Gold Fund told Reuters.
Bradley George said he saw the metal in a range of $1 100 to $1 400 an ounce this year and expected gold to extend its current climb as US debt levels, which have largely been ignored as concerns focused on the euro zone, come under scrutiny later his year.
“Gold will continue to rise as long as you have two things — low interest rates and macroeconomic uncertainty,” he said in an interview on Tuesday.
“Governments are likely to keep interest rates low to encourage economic growth, and macroeconomic uncertainty (will remain), probably with the US coming into the spotlight in the second half of the year,” he added.
“Investors will continue to move into gold either as a store of value or a safe-haven investment,” he said. “It works for both those types of investors.”
Gold prices tend to do well in a low interest rate environment, where the opportunity cost of holding a non-interest bearing asset like bullion is negligible.
“The Fed funds rate is likely to stay low for the remainder of the year, and with inflation starting to tick up you have this situation with negative real rates,” George said.
“In a negative real rate scenario, gold tends to perform particularly well.”
Gold rose 3.2 percent in May, by far the best-performing of the major precious metals, despite a sharp correction mid-month as it was caught up in selling of equities and other commodities.
A Reuters poll of 26 analysts last month showed most expected the metal to end the year above its current record of $1,248.95 an ounce.
Equities seen outperforming
But against a backdrop of rising gold prices, mining equities are likely to be a better buy than bullion, George said.
“The free cash-flow generation by gold miners, who put their austerity measures in place by cutting costs in 2008 and 2009, means they have operational cost control,” he said.
“Gold trading above $1 200 means a fantastic margin for these gold mining companies. They are generating good free cash-flow and their valuations don’t look stretched at all,” he said.
“The gold price will pick up, but gold equities could perform better than the gold price in this scenario,” he added.
Not all miners will benefit equally, he said, noting that companies outside South Africa, chiefly in the rest of Africa and North America, were probably better placed to benefit from rising gold prices.
“If you have the double whammy of a depreciating currency and a higher gold price, obviously the company that is receiving their revenue benefits from that flow,” he said.
“The problem with South African miners is that their costs aren’t as under control as some of the others. You have power costs rising there and labour costs rising, so their margin expansion is not as good.”
“Their costs are rising sometimes even faster than the gold price,” he said.
George identified African Barrick Gold, Red Back Mining and Barrick Gold as top picks in the sector.