Charles Gibson, mining analyst at Edison Investment Research , has predicted that gold could be poised for the second leg of a bull run after a brief recent hiatus. His premise is that world events, though extraordinary, are not without precedent: structural trade deficits, burgeoning budget deficits and bank failures were equally prominent in the 1970s. During that decade, gold rose from $35/ounce to its only recently surpassed record of $850/ounce - a 24-fold increase. While not expecting such a dramatic appreciation this time, should gold repeat the cycle of the 1970s it could average over $1,000/ounce over the next 21 years, with a short-term peak of over $1,567/ounce.
Indeed gold has been back in favour with investors this week as the bear market rally appeared to be running out of puff and this, coupled with an actual physical shortage of gold, has led some to predict another bull phase for the precious metal. Against this background, Mr Gibson has applied a new valuation methodology to identify investment targets. Gold companies have traditionally been valued using a benchmark of $35 per ounce of resource.
In contrast, Mr Gibson is refining this by applying benchmarks of $1.05/ounce for 'inferred' resources (estimates with a low level of confidence), $12.05/ounce for 'indicated' resources (estimates with a reasonable level of confidence) and $187.73/ounce for 'measured' resources (estimates with a high level of confidence).
By this methodology 27 companies are identified as cheap relative to their gold resources, although this alone can't distinguish whether those companies are likely to be able to turn resources into value. To try to identify these, they have been further screened by the average grades of their deposits (as an indicator of potential future profitability) and by whether they actually have positive historical earnings (as an indicator that they have a track record of successfully turning ounces in the ground into profits).
The research highlights Avocet Mining, Highland Gold and Pan African Resources in particular as attractive investment propositions. Each combines cheap in-situ resources with both historic profitability and relatively high grades.
