another spin on gold

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    from miningnews, a different way to look at things.

    Gold fund danger for gold mining stocks


    Monday, July 07, 2003
    THE new crop of stock exchange listed, gold-backed, investment instruments which enable even small investors to buy a "piece" of gold may prove to be a significant threat to the share prices of mining companies, according to a report in London.

    The Financial Times newspaper said on Saterday the problem of providing too many new gold investment avenues would be exacerbated if the World Gold Council proceeds with the launch of its ETF product – an exchange traded fund, such as Australia's Gold Bullion which has sold 100,000 ounces of gold since March.

    One precious metals analyst was quoted by the FT as saying that "fund managers wanting a pure exposure [to gold] will get it through ETFs, which could therefore reduce premiums for gold equities."

    The paper calculated that since the start of the year the price of gold mining company shares had strongly outperformed the price of gold.

    Two key gold indices in the United States were up more than 5% while the spot bullion price was up 2%.

    Analysts have calculated that the world's top gold stocks are trading on very high price/earnings (PE) ratios compared with the rest of the market. Barrick Gold is on an historic PE of 51, Newmont is on 40 and Placer Dome on 35. The average for the overall market is 30 – another pointer to a possible price correction.

    Andy Smith, precious metals analyst with Mitsui, told the FT that institutional investors would be better off buying gold call options than gold company shares.

    He said gold company shares "can never be a pure exposure [to gold] as they carry the geology and management issues that go with running a mining company".

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