Gold Stocks Sparkle for Investors as Equities Surge on ECB Moves

on Sep 13, 2012
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After last-week’s announcement of new measures to tackle the Eurozone debt crisis, equities including shares in gold miners, surged significantly, highlighting the potential profitability of gold stocks investments. According to market analysts, this trend supports the recent urge amongst investors to deploy their capital in income earning investment vehicles like gold stocks, rather than keeping them in physical assets.

The S&P 500 index of top American stocks reached its highest level in more than four years while European blue-chips’ stocks also jumped last week after the European Central Bank (ECB) announced a potentially “unlimited” bond-buying programme to ease funding pressures on Eurozone governments that sought financial help. The announcement of these plans, as well as the prospect of further quantitative easing (QE) by central banks in the United States and Great Britain, boosted the price of gold by 1.9 per cent, closing the week at $1,736. This upwards price movement helped to spur interest amongst professional investors who are increasing their exposure to the yellow metal.

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!m[](/uploads/story/351/thumbs/pic1_inline.png)“The ECB announcement and the potential for further QE support the case for higher gold prices. Having reduced our gold exposure at the end of last year and early in 2012, we have been gradually adding back to our positions over the summer,” said Ayesha Akbar, manager of the Fidelity Multi-manager Growth fund.

Only in the last two weeks of August, about $2.5 billion (£1.6 billion) was added to gold funds. According to research firm EPFR Global, this is the biggest flow in any sector for that period. Supporting this trend, Charlie Morris, head of absolute return strategy at banking and financial services company HSBC (LO:HSBA), doubled his exposure to gold this year from 5 to 10 per cent, 8 per cent of which is in the metal itself and 2 per cent in mining companies shares. Mr Morris’s expectation is that over the next five years, gold will prove to be a profitable investment as according to his estimates, the precious metal price could hit $4,000 an ounce by 2016.

Short-term forecasts have also been increased. Deutsche Bank (NYSE:DB) recently raised its estimate, saying that gold will average $2,050 next year. Previously the financial service provider had predicted $2,000. Other analysts are not so optimistic in their forecasts. Metals consultant GFMS suggests that this year gold will reach $1,800, while HSBC Global Asset Management expects the price to be $1,900. Others are even more sceptical. Last month, Morgan Stanley (NYSE:MS) revised down its forecast for gold for the fourth quarter of the year by 13 per cent, but this still suggests the price will reach $1,750. The financial services firm said it cut the forecast because markets were discounting the likelihood of further quantitative easing in the United States.

Despite the variety of forecasts, the overall expectation is that the price of gold will go up after the prolonged period of depreciation. Since September 2011, bullion have fallen 19 per cent, while gold stocks have gone down 40 per cent, said asset manager Smith & Williamson. These figures show that the price of gold equities in relation to the bullion is close to a record low. With the increasing investors’ confidence on the equities markets, however, this difference means that gold stocks offer greater leverage than bullion to the potentially rising gold price, making gold equities more attractive than physical assets investments, analysts say.

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