macquarie says golds are 28% undervalued

  1. 66 Posts.
    Interesting in this article that Macquarie thinks that Aussie golds are the most undervalued of all.

    Sharkie 13

    Friday February 7, 3:37 PM
    Room For Global Gold Equities To Rise 28% - Macquarie Bk
    Sydney, Feb. 7 (Dow Jones) - Share prices of gold mining companies around the world could rise as much as 28% from current levels, if fund managers lifted their assumptions of the gold price to $350 a troy ounce, Australia's Macquarie Bank said in a report Friday.
    The report attempts to shed light on why gold equities haven't performed as well as the spot gold price, which surged to a six-and-a-half year high of $388.90/oz Wednesday.

    Despite the rally in spot gold prices, the S&P Gold Index of big North American gold companies was, as of Tuesday, 13% lower than its peak in May 2002, according to the report, which was seen by Dow Jones Newswires Friday.


    By contrast, spot gold prices are about 15% higher than the around $324/oz seen in May 2002, the report said.

    The contrast "strongly indicates an assumption that much of the rise in gold prices is unsustainable," the report assessed.

    At 0524 GMT Friday, the spot gold price stood at $371.10/oz, nearly 7% higher than the $347.45/oz seen at the start of this year, and 19% higher than the 2002 average of $311/oz.

    The bank's metals and mining research division found, after analyzing data to estimate the correlation between gold prices and gold equities over the last 13 years, that gold equities are factoring in a bullion price of only $310/oz.

    If global fund managers lifted their medium-term gold price assumptions to $330/oz, then global gold equities could rise 14% from their current levels, while a gold price assumption of $350/oz could push the equities up by 28%, the report said.

    A readjustment by fund managers may follow shortly should gold prices hold at higher levels for longer than expected, in turn "providing considerable scope for equity market appreciation," it said.

    When fund managers lift their gold price assumptions, they are likely to raise their profit forecasts of the gold mining companies accordingly as well as their valuations of these companies' share prices.

    These moves would in turn spearhead buying of these shares.

    Australian Gold Equities Hold Greatest Upside Potential

    Turning to regional gold equities, Macquarie found that share prices of Australian gold companies since July 2002 are the most undervalued, compared with their peers in North America and South Africa.

    As Newcrest Mining Ltd. and Lihir Gold Ltd. are the only two Australian gold mining companies represented on the FTSE Australian Gold Index in London, "any concerns over these two companies will determine the trend in the index," Macquarie said.

    As well, shareholder concern about hedging has had an "exaggerated impact" on the Australian gold sector, "most obviously" on Newcrest, as well as on some North American gold companies, such as Canada's Barrick Gold Corp., the report said.

    Hedging, or the practice of selling future production at a set price, was widespread among gold mining companies in the last decade as a safeguard against falling bullion prices.

    However, the practice backfires when prices rise, as it means that these companies wouldn't be able to capitalize on the higher prices.

    Thus, investors have been less favorably disposed to gold mining companies that hedge more, compared with those that hedge less.

    North American gold companies are modestly undervalued, whereas South African gold stocks are the most fully valued, said Macquarie.

    Given the current phase of consolidation in the Australian gold industry, it would suggest "that the Australian gold stocks theoretically hold the greatest upside potential," Macquarie concluded in its report.

    Wong Chia Peck, Dow Jones Newswires, 612-8235-2957 [email protected]
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