The prospects for equity markets and numerous sector indexes have dimmed during the global recession, but gold and the companies that mine it have not lost their lustre.
With gold prices nudging their all-time high and energy and other costs falling, mining company profit margins are widening, making their shares attractive, analysts said on Thursday.
"Within the next year, we will see the gold stocks sell at significant premiums to traditional earnings measures or net asset value measures," said Robert Lutts, Chief Investment Officer of Cabot Money Management in Salem, Massachusetts, which manages $400 million (Dh1.4 billion) of assets.
"I have owned Barrick Gold for one reason only – because it has the biggest pile of gold in the ground," Lutts said of the world's biggest gold producer, Canada's Barrick Gold.
"New interest continues in this increasingly attractive sector," JPMorgan analyst John Bridges wrote in a note.
"We feel all funds should have a core long position in the metal or the equities."
Moreover, analysts expect acquisitions in the gold sector to accelerate, as larger players pounce on their cash-strapped smaller colleagues, in a bid to grow their base.
"I believe in investing in both bullion and stocks," said Jeffrey Nichols, managing director of American Precious Metals Advisors.
"Large companies with strong cash positions are in a good position to take advantage" of a higher gold price.
Lower fuel, raw materials and equipment costs, combined with weaker Canadian and Australian dollars and a flight to gold as a safe haven, have spurred gold miners' stocks recently.
The gold and silver index .XAU, which comprises major US and Canadian gold mining stocks, has more than doubled over the last four months. Spot gold XAU was selling for $978.80 per ounce in New York on Thursday, closing in on its all-time high of $1,030.80 from March 17.
"At these levels, we would encourage new investors to begin by buying a little Newmont," Bridges wrote, after Newmont Mining Corp, the world's number two gold producer, reported better- than-expected fourth quarter results.
Since most major gold players no longer hedge production, they stand to gain from the recent run-up in gold prices.
Nichols touts Barrick and its Canadian peer, Goldcorp Inc. "In general, I like Barrick and Goldcorp because they are well managed, with management you can trust, providing a good return on investment."
Credit Suisse analyst David Gagliano saw Newmont as an attractive investment after its solid fourth-quarter results. "Newmont is entering the sweet spot," he wrote in a research note noting higher production, lower costs and lower capital expenditures due to the proposed start-up of Boddington, which will be Australia's biggest gold mine.
"Add to this the favourable gold backdrop and declining raw material costs, and we believe Newmont is set up nicely for a strong 2009," wrote Gagliano.
Peter Spina, who operates Goldseek.com, a website for investors, said now is the time to invest in gold miners. "I think mining companies are looking a lot better," he said. "With costs down, the profit margins are expanding and people are saying: 'where should I invest in this market?' The gold mining companies are the place to be." Spina noted that capital markets appear to be opening up.
"We are now seeing more competition for capital where three months ago it was impossible," he added.
Spina likes the junior players, such as Denver-based Gold Resource Corp, which is developing projects in Mexico. Genuity analyst Tony Lesiak expects larger gold players to swoop in on some of the smaller miners.
"Merger and acquisition activity in the gold sector could be poised to accelerate," said Lesiak.
He cited the improved outlook for precious metals, the disconnect between larger companies and cash-starved juniors, and a paucity of internally available quality growth projects.