Shares in gold-mining companies have fallen in recent years, even as the price of gold has risen – at least until last week’s sudden sell-off. However Gambarini, who is associate director of research at the company, says that as the global economy – led by China and the US – begins to recover she expects gold equities to close the gap on the price of the commodity.
"Gold miners’ shares have historically tended to be strongly correlated with the gold price, but this trend has declined in recent years," she said.
"While the business fundamentals of miners as measured by margins and cash costs appear robust, a closer inspection of exploration and capital expenditure reveals a completely different picture."
"Lack of new discoveries, coupled with extinguishing brown-fields, has left mining companies with a production gap and cost that has undermined their performance."
"The introduction of gold ETPs has also provided investors with a more direct alternative to gaining exposure to gold price moves."
"However, mining companies have become increasingly aware of the lack of transparency and over-budget projects in the industry and are undertaking some drastic changes to reverse the current de-rating of the gold price."
"Gold miners have historically tended to outperform gold during periods of rising global growth and their valuations have now dropped from a substantial premium, to a discount to broad mining sector valuations, indicating likely limited scope for further de-rating."
"With China and the US showing signs of economic recovery and equities back in favour, there may be scope for miners to begin to claw back some of their performance gap to gold."
FE Analytics shows the huge divergence of returns from gold bullion compared with gold equities over the past decade.
Performance of indices over 10yrs
Source: FE Analytics
Over 10 years, gold has returned 339.25 per cent while the HSBC Global Gold index of gold-mining companies has returned 76.02 per cent.
But as the graph shows, the real difference of returns began during the financial crash of 2008.
Over five years, the S&P GSCI Gold Spot index has returned 100.79 per cent, while the HSBC Global Gold index has lost 19.07 per cent.
Gambarini says that due to historically low price/earnings ratios (P/E) and changes in the management style of miners, the current climate could represent a healthy buying opportunity.
"While gold miners have historically traded at a premium to other equity sectors, their P/E ratios have fallen below those of the S&P 500 and of the base metal miners," she said.
"Based on historical P/E ratios, gold miners are now trading 70 per cent below their 10-year average and 48 per cent below their five-year average."
"While the average P/E ratio of the companies constituting the S&P 500 and the material sector within the S&P 500 dropped by 26 per cent and 40 per cent respectively over the past 10 years, gold miners’ multiples fell by more than 70 per cent over the same period."
"This trend is unlikely to continue, given the changes that the industry as a whole is undertaking."
She added: "Although the recent changes in management and strategy will take time to produce a material impact on the industry, with average P/Es now below the mining sector average, current valuations may set a floor to any further de-rating."
Gambarini says that while it is understandable that investors have avoided the troubled gold mining sector, she says the strong possibility of an extended bull market plus a change of attitude towards their shareholders means they cannot afford to ignore the sector anymore.
"Despite the poor performance of gold miners’ shares over the past couple of years, investors should not disregard the potential benefits of investing in the mining sector," Gambrini said.
"Over the past 10 years, gold miners have tended to outperform the gold price during periods of rising global business activity."
"Investors looking for income might also find gold mining stocks increasingly attractive."
"Although dividend yields in the gold mining industry have traditionally been low compared with other sectors, some companies are now distributing bigger dividends."
"Over the past six months, average dividends distributed by gold miners have more than doubled to over 1.5 per cent."
"This trend is likely to continue as scarcity of profitable projects is increasingly forcing companies’ management to reward investors via higher dividends," she added.
FE Alpha Manager Evy Hambro's BlackRock Gold & General fund is one of the highest-profile portfolios that would benefit from any surge in gold equity prices.
It counts gold mining giants such as Newcrest Mining, Goldcorp and Randgold Resources in its top-10 holdings; it even increased its holding in Randgold this week, suggesting it agrees valuations are now attractive.
Smith & Williamson Global Gold & Resources also has a high weighting to gold miners, and both funds have lost money over three and five years while the sector has suffered.