Metal demand may be slow, but hope runs high for gold
BY NOW the global financial crisis has hopefully taught investors that just like property prices, metal prices do not always go up.
BY NOW the global financial crisis has hopefully taught investors that just like property prices, metal prices do not always go up.But it is also important to note that not all metal prices move in tandem. Even among base metals during the boom, nickel, copper, zinc and aluminium each reached their peaks at separate times, often a year or so apart.Last year bulk commodities such as iron ore, coal and manganese proved better performers than their base metals peers like nickel and zinc. And in 2007, coal prices actually fell and uranium and nickel were the flavour of the month.The global economic downturn means demand for most metals is expected to be subdued this year, although to varying levels. Most analysts, for example, think copper has much better fundamentals than nickel and aluminium due to supply/demand balances.And it is rather easy to forget that during the mining boom gold stocks were hardly among the top performers. The rising cost of fuel, labour and equipment because of the high prices for other metals, combined with the high Australian dollar, legacy hedging and operational issues meant the gold sector put in a weak showing.But there is hope that gold will perform better this year. Goldman Sachs JBWere last week noted it was "the most plausible exception" to its prediction that annual average commodity prices would be significantly lower this year than last year. Deutsche Bank agreed, advising investors to go long on gold and short on bulk commodities and base metals.Boom timesApart from the high gold price in Australian dollar terms, anecdotal evidence that the global gold sector is performing relatively well is stacking up before quarterly reports from large producers such as Barrick Gold and Newmont Mining.In a market update last month the contract driller Boart Longyear said that, if anything, goldminers were increasing exploration and production while other miners shut operations. And The New York Times ran a lengthy report this month on boom times in Nevada because of the strong gold price, in a similar vein to Australian media interest in the Pilbara last year. The gold price reached highs of more than $US1000 last year - when the Australian dollar was very high - but has traded in a range of $US700 to $US900 an ounce in the past few months. Typically, gold and the US dollar have an inverse relationship, while gold and the Australian dollar tend to rise at the same time.After the collapse of Lehman Brothers, gold defied expectations by not proceeding to rise tremendously. Instead, many investors poured money into US dollars - seeing treasury bills as a safe haven - and others were forced to liquidate gold positions to deleverage their portfolios.But as Goldman Sachs JBWere noted, the US dollar can be expected to weaken once deleveraging is completed, and stimulatory economic policies are likely to prove inflationary, boosting demand for the classic inflation hedge: gold.Check the cashLuckily for Australian investors, there is a host of promising locally listed goldminers.Difficulty raising adequate financing means that investing in junior explorers - even ones with great projects - is suited for those willing to wait a few years before receiving strong returns. If contemplating an investment in an explorer, it would be a good idea to look at the cash balance, to ensure it has enough money to be able to continue work on the project - and pay its staff - for at least a year. For those looking to capitalise on the potential for higher share prices and/or dividends in the nearer term, it would be best to stick with miners already in production.The weaker Australian dollar makes low-cost domestic production look particularly attractive. And, as Merrill Lynch noted on Friday, that plays into the hands of investors in Newcrest Mining, which once again may be an attractive takeover target for big North American producers.Other picks with domestic operations include Dominion Mining - whose Challenger operation produced gold for $A400 an ounce in the September quarter - and Avoca Resources, which is ramping up production at its Higginsville project.Should the gold price really start to soar, higher-cost producers will start to look more attractive, due to their increased leverage and therefore potential for even higher share price gains than low-cost counterparts. In that case, St Barbara and Apex Minerals would be worth a look.Sino strengthFinally, although the gold price does not look quite as attractive in US dollar terms as in Australian dollar terms right now, investors should not write off Australian-listed companies with strong operations overseas.Sino Gold's early entry into China has given it a strong base in that nation. It expects to produce 210,000 to 230,000 ounces of gold at a cash operating cost of less than $US400 an ounce from two mines this year, and has other growth projects under way.While the political situation in Thailand may be too risky for some investors, Kingsgate Consolidated may be a solid performer over the medium term after it was granted its long-awaited mining leases for its Chatree North extension last July.Potential investors in Lihir Gold might want to wait to see its December quarter production report later this month before buying the stock, as some analysts are concerned it may lower its forecasts. But once news is aired, signs of price weakness may represent a buying opportunity.
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