Tuesday, January 21, 2014

Is 2014 The Year For Gold Producers Or Bullion Prices?
20/ 01/ 2014: Analysts are mixed as to whether shares of gold producers will outperform gold bullion prices in 2014.

Adam Patti, CEO of IndexIQ, a developer of exchange-traded funds, said that he is very bullish on the commodities sector; however, instead of looking at bullion, the Patti said the company is looking at producers.

IndexIQ doesn’t have a dedicated precious metals ETF; however, the company’s Global Resource Index (NYSE: GRES) includes a precious metals component, which Patti said includes producers and not physical gold or derivatives.
Patti explained that the company’s index is rebalanced every month, and in the last four months the precious metals component has been invested to its full weight at 22%.

“I think physical gold is going to be sideways or have a slight appreciation this year,” he said. “I think the opportunity in precious metals is going to be in precious metal producers. Given how far the producers have fallen…, I think that is a good place to be.”

Although they have a positive outlook for commodity markets and the gold market, Patti said that they can’t rule out another drop in price, especially in the first quarter as investors continue to rebalance their portfolios. Investors are still spooked when it comes to gold and gold producers; however, right now they are looking at value and see potential in the sector, he added.

“Certainly, precious metals shares, at least from our research, are historically undervalued,” he said.

Colin Cieszynski, senior market analyst at CMC Markets, agreed that there is potential for gold stocks in 2014, especially if gold prices continue to stabilize.

Looking at the gold market, Cieszynski pointed out that prices are carving out a strong bottom and he is expecting prices to trade between $1,200 and $1,400 an ounce this year.

He added that the stability is already creating some confidence in the market as companies are starting to look at strategic investment. Goldcorp Inc.’s (TSX:G)(NYSE:GG) hostile bid for Osisko Mining Corp. (TSX:OSK) is an example of producers starting to see value in the sector again, he said.

“Gold just needs to stabilize and things could get interesting for producers,” he said. “The majors are looking for assets and they are starting to think they can scoop things up at a good price. When that starts to happen, it suggests that the sector is starting to become cheap.”

Although Cieszynski agrees that there is potential in 2014, the gains won’t be even spread throughout the sector.

“Companies that have low costs and value-added projects are suddenly going to become attractive,” he said. “I think this year it is going to be about picking the winner and picking the survivors. It is going to be important to find the companies that can still perform in a low-price environment.”

Jeffrey Nichols, managing director of American Precious Metals Advisors and publisher of NicholsOnGold.com, agreed that some producers should do well this year; however, he still sees more potential for bullion prices in 2014.

He added that the creation of ETFs like SPDR Gold Shares (NYSE: GLD) have changed the investment environment. He pointed out that before ETFs, the only way some investors could be exposed to precious metals was through shares of producers but that is no longer an issue.

“It’s no accident that gold shares have underperformed gold bullion,” he said. “We have seen this shift from gold equities to gold bullion and it is going to last for some time to come.”

While some investors are optimistic about mining shares, Nichols said that it is going to take more than gold trading sideways to create momentum for the sector. He added there is also a risk that gold prices continue to fall further as prices remain in a bear market, which could also weigh heavily on producers.

“As long as gold prices are at these levels, it is a difficult environment for gold mining companies; of course, there will be exceptions,” he said. “If gold prices do start to rally, investors will probably wait a little bit longer before jumping back into gold equities.”

Nichols added that not only are gold equities sensitive to gold prices, they are also impacted by the overall equity market. With equities trading near all-time highs, he said there is a risk of a market correction, which could spook already nervous investors of gold stocks.

“In the short run, a sell-off in equities may affect gold negatively,” he said. “But gold is likely to come back quickly and do better because of broad market uncertainties and that is not going to include mining shares

Courtesy: Kitco  News