"Gold’s up more than $200 this year, and continues to break its own record high, but comparatively gold shares have been disappointing and are consequently looking very cheap at the moment," said Adrian Lowcock, senior investment adviser at Bestinvest.
"There is a massive gap between the gold price and mining stocks, which is going to have to close at some point soon. From a valuation point of view, choosing between the two is a no brainer."
Though the gold price has risen by more than 20 per cent so far this year, mining stocks have struggled. According to FE Analytics data, every gold-focused fund in the IMA unit trust and OEIC universe has lost investors money in 2011.
Performance of gold funds and indices
| Name |
2011 returns (%) |
| S&P GSCI Gold Spot |
23.11 |
| BlackRock Gold & General |
-9.44 |
| Investec Global Gold |
-12.18 |
| WAY Charteris Gold Portfolio Elite |
-12.91 |
| Smith & Williamson Global Gold & Resources |
-14.29 |
| MFM Junior Gold |
-17.08 |
| SF t1ps Smaller Companies Gold |
-20.66 |
| CF Ruffer Baker Steel Gold |
-20.80 |
Source: FE Analytics
Lowcock’s views echo those of FE Alpha Manager Tom Winnifrith, who said in a recent interview that the fundamental disconnect between the gold price and gold equities will soon correct.
Winnifrith also said the increased profits achieved through operational gearing give gold shares a big advantage over a gold-price tracker.
Nicholas Brooks, who heads up research and investment strategy at ETF Securities, agrees that gold equities are cheap by historical standards; however, he sees no reason why a portfolio can’t hold both gold shares and bullion.
He commented: "The ratio between the gold price and the DAX global gold mining index is at around 40 per cent at the moment, which is way above its 10-year average. Bullion has risen far more sharply than gold shares, so from a valuation point of view they are very interesting."
"However, physical gold and gold equities are very different investments. While miners benefit when the price goes up, they also have to contend with equity market Beta and the impact of costs."
"Gold shares tend to perform better than the stock market in down-periods, and beat the gold price in up-periods due to operational gearing. In this sense, it could be said that physical gold and gold equities complement one another."
Both physical gold and gold mining ETFs have received mass inflows over the last month.
Brooks believes gold miners could get a big boost if the Libyan crisis manages to resolve itself.
“At this stage, it sounds like a resolution is being moved towards,” he said. “If this does happen, the oil price is likely to come off substantially, which should be positive for gold equities as costs would be reduced.”
While technical strategist at Cazenove Robin Griffiths acknowledges that rising wages are presenting a real problem to miners, he agrees that gold equities are at a good entry point.
“In South Africa, wages are up to such an extent that there is talk of miners being laid off,” he said. “That said, [gold] shares are looking very cheap on a longer term basis. Eventually these companies will perform – there’s plenty of gold in the ground and the rising price will provide plenty of support.”
Griffiths believes the price will break its inflation-adjusted high of $2,400 sooner rather than later, and says the precious metal could hit ‘several million dollars’ by 2016.