Dividend hikes and more money printing boost gold sector prospects, managers say

The possibility for central banks to switch on money-printing machines again, and gold miners increasing dividends, continue to boost the case for bullion and gold equities, managers say.

They speak after bullion fell by nearly 20% since it hit $1,920 per troy ounce in early September.

The managers’ words are supported by the Thomson Reuters GFMS annual gold survey published this week, which suggested forecasts of over $2,000 for this year as concerned small investors in Germany and Switzerland buy ingots and coins.
The news is not bright only for physical gold buyers.

Edward Perks, director of core, hybrid portfolio management in Franklin Templeton’s equity group, said his company’s analysis suggested many gold miners were “in better shape than they were at the beginning of the year”.

He said miners’ shares did not follow the rise of the gold price for much of last year, because investors were not confident to discount higher prices into company valuations, because they were not sure gold would keep rising.

“In the current environment this divergence appears to us to have created many investment opportunities in the industry,” Perks said in Franklin Templeton’s 2012 Investment Perspective report.

“A number of companies have enjoyed record margins and generated significant free cash. Some of this has been returned to shareholders through dividend increases.”

Perks said it was difficult to forecast the price of gold. Nevertheless, he added, “we remain focused on seeking to identify what we regard as the best-positioned companies to potentially create shareholder value by developing new mining projects and discovering additional gold reserves.”

Iain Stewart, manager of the Newton Real Return Fund, added the dividend yield on the Datastream global gold mining index has now reached its 2008 peak again, and several companies are boosting payouts.

He said the recent price falls – about 20% since the high of $1900 in early September – came after America’s Federal Reserve failed to print money heavily a third time in the crisis, and instead announced the less aggressive ‘Operation Twist’ that month.

Printing money would effectively have made each dollar less valuable, boosting the attraction of gold, a ‘hard asset’ currency.

The same can be said of eurozone politicians led by Germany, who have repeatedly stopped the European Central Bank printing euros heavily, most recently in December.

 

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