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At the beginning of last week gold passed $1,700 oz and has continued to climb but we think that gold has still got a lot further to go before reaching its peak. If we are correct then for investors in the SF t1ps Smaller Companies Gold Fund this is GOOD news. If you have no exposure to gold stocks this is BAD news. We would ask: Can you really afford to carry on with no gold exposure?
Following Standard & Poor’s cutting of the US AAA rating, the ongoing concern about outright default of sovereign debt in Europe and inflation levels across the world as Governments prepare for QE3, we think that Gold is the only game in town.
With paper currencies increasingly viewed as flawed we believe that the rise of gold will continue and we expect to see $2,000 oz within months. Of course some folk reckon that gold is a bubble. These doubters made the same suggestion when gold passed $1000 and again at $1500. We think they are wrong once again but of course that is unproven. Assuming that gold does head higher what does that mean for gold miners?
With oil prices slipping it means that they are now generating record cashflows. Yet the share prices of gold miners fail to reflect this. Amid the general market weakness shares in gold stocks have performed weakly as investors sold gold stocks to realise cash to pay for losses elsewhere. We believe that this is a short term timing issue.
Ultimately with many gold stocks now trading on cashflow multiples of just 1, 2 or 3 but with the producers throwing off record cashflows, history suggests that there has to be massive bid action as the producers recognise that the cheapest way to replace production is to "drill in the City" - to buy their smaller peers. We have already seen bid action in Canada and Australia and we reckon that there is a stack more on the way.
This and an investor flight into gold stocks as those with no exposure start to panic must surely drive a massive re-rating. Of course we always remind you that the value of your investment and income from it can go down as well as up and you may not get back a significant proportion of your investment. But at these levels we believe that the risk reward ratio has never looked better.
Gold guru Malcolm Burne, who advises the SF t1ps Smaller Companies Gold Fund wrote just this week:
Gold is now at last accepted as money and therefore only insurance currency around. With energy costs retreating at last and gold producers in Aus and Can looking at better forex margins...gold equities are now gaining traction, much more so as soon as general equities stabilise.
Of course investing in individual gold stocks can be risky and that is why we suggest backing our fund - a carefully balanced portfolio of mid cap producers and near term producers - a pool of likely bid targets in the current climate. Our fund has taken advantage of the disconnect between the gold price and gold equities to buy more shares in what we own on an aggressive scale. If we are correct about gold then the rewards should not be long in coming...