Going for Gold, Aussie Style25.09.2015

Small Cap Stocks: Gold Producers

The weakening Australian dollar and leveraged balance sheets has put a rocket under a select number of small cap gold producers listed on the ASX, which includes a five fold increase in the West Australian based St Barbara in the pat 12 months.

Unity Mining and Ramelius Resources have doubled in the past year, while the ASX listed small cap Millenium Minerals has doubled since releasing its quarterly report in late July.

“All had debt and operational issues but they’ve been turning things around the market thinks they’ve good chance of paying off their debt,” says sector specialist Matt Trivett of Patersons Securities.

But it appears the sector as a whole hasn’t benefited with Patersons’ own index of gold stocks falling 4 per cent in the past 12 months and 25 per cent since May.

It seems that investors are overly concerned about the US dollar based gold price, which at US$1120 an ounce is down 6 per cent over the past year.

These concerns are ignoring the 20 per cent depreciation in the Australian dollar against its US counterpart in the past year, however. The Australian dollar gold price has climbed 14 per cent and trades at A$1560, having traded as high as A$1650.

Under the Radar likes Australian based gold producers

We like Australian based gold producers because any negativity in the gold price is counterbalanced by an depreciation in the Australian dollar. The same factors are at work. These gold producers are getting a competitive edge against their global competitors that didn’t exist even a year ago.

The other point to take note of is that producers are reducing their risk through hedging forward gold sales, according Trivett. Evolution Mining, Metals X, Northern Star Resources, Doray Minerals and Saracen Minerals have increased their hedging from 5-10% of forward sales to 20-30%.

We have our favourites, but in the end, the question with gold is, why bother? After all, the yellow metal is notoriously absent when it comes to being used much for anything productive.

Why Under the Radar Report likes Small Cap Gold stocks

We like gold simply because it has proven to be an effective portfolio hedge. It’s the one thing that historically hasn’t been effected when the proverbial hits the fan. It worked during the financial crisis and its aftermath, between 2008 to 2012; and during the oil crisis and associated hyper inflation in the 1970s.

With apologies to Winston Churchill: Gold is incontrovertible. Malice may attack it, ignorance may deride it, but in the end, there it is.

Gold Stocks are a hedge

These days, gold is a hedge to the possibility that Central Bank policies of effectively printing money to reflate economic activity doesn’t work. It is a hedge against stock and bond markets which have become universally expensive and homogenously priced, because loose money floats all boats.

There is significant operational, not to mention environmental risk in the sector. Only last month in Colorado, EPA workers triggered a huge blowout at a leaking gold mine, causing contaminates to pour into the river. This included cadmium, arsenic, copper, lead and zinc and stretched for more than 100 kilometres in the form of a mustard coloured plume.

Under the Radar Report, is edited by Richard Hemming. We will help you to find small cap stocks with growth opportunities for your portfolio.

About the Author

Richard Hemming

Investment analyst and Editor of Under the Radar Report

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