Gold stocks

AS is always the case when capitalism ponders its own mortality, gold has been touted as the one-stop insurance against both inflation and asset deflation.

Other factors - such as the level of demand from Indian brides during the upcoming wedding season - take a back seat.

As investors have been painfully aware, gold's safe-haven virtues often have been lost in translation when it comes to the listed gold sector. Production glitches, soaring costs and hedging snafus have produced a casualty list longer than that from the Somme in 1916.

With gold at around $US750 an ounce and the Australian dollar slinking below the US80c level, macro conditions shouldn't be more amenable.

The major local producers Newcrest (ASX: NMC) and Lihir Gold (ASX: LGL) have shed their unfavourable hedges, while there's a raft of potential projects (such as AngloGold Ashanti's Tropicana deposit near Kalgoorlie), which should see production.

Unlike dozens of nickel, zinc and copper projects threatened by the pullback in base-metal prices, the gold sector's aura should dazzle for some time to come.

That's the theory anyway, but it's a bit like the errant husband promising, “It will be different from now on, darling”.

For those who subscribe to the financial Armageddon line, the obvious starting point is the extant producers, and Newcrest and Lihir are by far the biggest.

There's no gold heist on offer: Newcrest and Lihir don't exactly look cheap on forward price-earnings ratio of 19 times and 14 times, respectively.

As Deutsche's gold bugs note, these are consistent with valuations across the US gold sector. These producers are also below the median cash cost average of $US420 per ounce and look relatively cheap in terms of per-dollar of reserves.

The firm says: “Overall, both Newcrest and Lihir offer good exposure to the gold sector at a time when our commodities team sees gold as being negatively correlated to the risk of equity contagion spreading to the commodities market.”


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Gold stocks | The Australian