Gold is cheap

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The relationship between the gold price and the performance of gold stocks is always volatile. In theory gold stocks should outperform when the physical metal is rising, a sort of amplification play. In practice, no such certainties apply, principally because there are operational issues to consider, plus often unknowns in terms of the reserves. It is thus firmly in the high risk high reward category, which is at odds with the usual reason people look to gold, that is, a play for the risk averse. Macquarie has a report on Australian gold equities that is reasonably bullish:

Over the past three months, there has been a sell-off across the global gold space which has somewhat reflected a declining gold price while capex and operating costs have increased. That said, we note that even at current levels, all of our coverage universe is operationally cash flow generative (and significantly so, in the majority of cases). We therefore highlight that the current valuations of the Australian gold equities appear cheap on both relative and absolute terms.

Macquarie is arguinig that the fundamentals are looking positive, even if the gold price outlook is not necessarily certain:

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Despite continued pressure on the gold price and the corresponding falls in the equities, we remain positive on the 12-month outlook for gold equities. This is particularly the case when we compare the current gold price of +US$1,600/oz against the current trading levels of our coverage universe which imply a gold price of ~US$1,350.

Top Picks. Within the ASX-listed gold space our preferred producers remain Newcrest, Perseus and Evolution while from the developers and explorers universe we prefer Beadell and Gryphon.

Macquarie (25)