Gold might be trading near all-time highs in absolute terms, but attendees at last week's RBC Capital Markets London gold conference were in little doubt that it could still go higher. Almost 90 per cent of respondents expected to maintain or increase their exposure to gold equities over the next three months, and 61 per cent expressed a strong preference for gold equities over bullion or exchange traded products.
A recurring theme at the conference and in recent meetings with fund managers is that investors want higher returns. The majority of conference respondents wanted a yield of more than 3 per cent, although Graham Birch, who used to run BlackRock's World Gold Fund, argued that miners should invest in exploration when gold prices are high.
The gold companies present recognised that they were benefiting from both higher gold prices - currently around $1,350 per ounce - and a record level of cash margin. The miners felt that as inflation reasserts itself, particularly with the rand remaining strong against the dollar, they could see margins compressed, even with the strong gold price. Two key areas of concern are rising fuel and labour costs, which typically account for 40 per cent and 30 per cent, respectively, of mining costs. This is compounding the effects of many mines maturing and having to go deeper, and gold grades declining as a consequence.
Chief executives of the larger miners considered the current valuations of potential targets too high. Greg Hawkins, chief executive of African Barrick Gold, confirmed that his company's focus would remain on organic growth rather than making acquisitions, and that paper-based transactions were difficult at the current share price.
The conference's optimism is supported by the World Gold Council, which in its Gold Demand Trends report for the third quarter of 2010 stated: "Global gold consumption for 2010 will be higher than 2009 as a result of increasing levels of demand in India and China, sustained global demand for gold investment, together with growth in jewellery and industrial demand."
