Angelos Damaskos, CEO of Sector Investment Managers and fund adviser to the Junior Gold fund, says the US Federal Rerserve's QE3 is good for gold investors.
Angelos Damaskos, CEO of Sector Investment Managers and fund adviser to the Junior Gold fund, says the US Federal Rerserve’s QE3 is good for gold investors.
In today’s global economy, the printing of money by the highly indebted nations and regions appears to be the only way to deal with problems. As the Federal Reserve (FED) and European Central Bank (ECB) announce successive Quantitative Easing, bond re-purchase programmes and other similar measures, we expect that the euro and the US dollar will devalue against the currencies of healthier economies such as Australia, Canada, Norway and Sweden. Given that the euro and the dollar are the leading reserve currencies of the world, concerned investors increasingly look to safe-havens that can protect their wealth from devaluation. A prime example of an asset with wealth preservation qualities is gold.
Following recent announcements indicating further money-printing by the FED and the ECB it should not be surprising that the price of gold has resumed its uptrend, on course for its twelfth successive annual gain. Importantly, it has broken the psychologically important level of $1,700/oz, widely seen by technical analysts as key “resistance”. The FED’s decision to extend the period of short-term interest rates to 2015 and commence a programme of buying agency mortgage-backed securities to the order of $40bn per month shows their determination to fight unemployment. By effectively lowering the longer-term cost of money they hope to stimulate fixed-asset investment and, consequently, labour employment. This is, arguably, a more pragmatic and direct approach than the ECB’s government bond buying programme. Nevertheless, the FED’s approach risks further stoking inflation and dollar devaluation, the main reason why investors have, again looked to gold as safety and pushed its price to over $1,770 per ounce.
Whether based on fundamental or technical indicators, gold’s recent price action looks good. This move is also excellent news for gold mining stocks that have been sold-off and unloved by investors for over a year now. At this price, the cash-flow generation and profitability of producing companies can expand rapidly. We believe that we are in the early stages of the next major re-rating for gold mining equities as a sector, particularly smaller to middle capitalisation companies. The share prices of those companies with strong balance sheets, good management, growing production and reserves are likely to outperform. Junior Gold’s portfolio is well positioned in this environment.