Hong Kong based Financial Services Group, REORIENT, is decidedly bullish on gold, and on gold stocks in particular, and has set out its reasoning in a new sales commentary.
LONDON (MINEWEB) – Investors in gold equities have had little cheer in the past couple of years – indeed the period has seen a sell-off not experienced in the sector since the Bre-X fraud exposure of 1996, which had a huge downside impact on gold stocks, particularly in the junior gold sector. But so far this year – admittedly it is very early days yet – gold stocks have proven to be the sector to be in and while the major global stock indices have drifted downwards so far many gold stocks have risen by up to 30% or more.
Is this the signal the market has been waiting for to get back into what has to have been the most oversold stock market sector of the past two years?
Hong Kong based Global Financial Services specialist, the REORIENT Group, certainly thinks this is the case and is distinctly bullish on the gold stock market sector. In a note the Group puts forward a number of factors which it sees as distinctly bullish for gold stocks – and they may well have a strong point here with all of these:
First, the quite sharp sell-off in many resource currencies – the South African Rand and the Australian and Canadian dollars to name but three, against the US dollar in which the gold price is mostly followed, has meant that the gold miners in those countries are generating windfall profits through the higher local currency price of gold, and while this tends to balance out, as it leads to cost inflation over time, there is a distinct lag leading to higher earnings per share.
As a rule of thumb REORIENT calculates that every 10% devaluation of the currency translates into an 8-9% increase in earnings for a gold producer. However when the earnings of these companies are this depressed, the leverage is actually higher, because of their cost cutting initiatives in the last two years.
Secondly REORIENT comments that cost cutting initiatives implemented in the past 2 years are now beginning to take effect and are having a major positive impact on gold miner earnings.
Third, the Group comments that the gold miner earnings consensus from the mainstream analysts has been cut by over 80% over the past two years and we are thus due for a big upswing.
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