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A. Precious Metals prices have spiraled up in 2011
Looking back to 2011, international gold price has kept spiraling up with three stages. First,
gold price increased 5.5% in 1H11 from US$1421.55/Oz at the end of 2010 to about
US$1500/Oz in late June, which is mainly attributable to the USD depreciated for the QE2
and worsening European sovereign debt crisis. Second, as we expected in 2H11 report, gold
price had speeded up since July and recorded a new high of US$1920.38/Oz, because the
rating for the U.S. was downgraded and European sovereign debt crisis spread to core
economies. Last, gold price has plumped since September and the trend has gone down to
the end of this year, when the price has fallen down US$1600. In sum, gold price has
advanced around 8% in the whole year.
In our view, recent decline has been mainly caused by the tightening liquidity for the
Sovereign debt crisis. According to LBMA, the gold lease rate stands at the low level
compared to that in past ten years. While the US dollar is in shortage, banks may borrow the
dollar but lend their gold, then the gold lease volume ramped temporarily, so the gold supply
becomes bigger, which let the lease rate hit maintain low. Therefore, the hedging attribute of
the gold is ignored temporarily.
Compared to about 8% increase of gold price, global gold stocks have lagged behind in
2011 and only a few like Newmont、GOLD FIELDS and other leading companies have
realized a rise. Meanwhile, all gold shares listed in HK have experienced the drop, among
which only China Precious Metals（1194.HK） and Zhaojin Mining（1818.HK）performed
comparatively better, with about 21% drop. The worst performer are China Gold International
Resources（2099.HK） and Lingbao Gold（3330.HK） who have lost nearly 60%. We think
the first reason for their weak performance is the sluggish stock market. In 2011, besides the
U.S. market, stock markets of Europe, Japan and emerging economies have fallen at large,
and the HSI even has been cut down nearly 20%. What’s more, largely increased cost has
eaten some profit of gold sector instead of higher gold price. Therefore, its profit growth
becomes lower and shows unsatisfied prospect. What’s more, with the government’s more
care on economic structural reform, the environment factor becomes more important, so
some gold manufacturers also perform badly for negative environmental incident. For
example, Zijin Mining (2899.HK), a leading gold enterprise, has also lost 37%.
B. Gold price may rise after the fall in 2012
1. Tightening or loosening monetary policies?
Flooded liquidity has been the main reason for the bullish gold since 2000. Within ten years,
major economies like the US and China has printed money as much as or more than that
printed in previous decades or hundreds of years. When economic growth slows down or
even falls into depression because of the European sovereign debt crisis, major economies
have begun loosening their monetary policies. For example, Brazil, Australia and the ECB
have adjusted downwards the benchmark interest rate, other smaller economies like
Indonesia have even cut down the rate more often. Moreover, because of the high inflation,
many economies have fallen into negative real interest, so the opportunity cost for gold is
very low. Historically, easing monetary policies normally benefited the gold price.
Looking forward to 2012, we still think monetary environment will be more loosening. Though
the expectation to raise interest rate comes forth for better economic data in the US, we still
think it doesn’t have the motion to tighten its monetary policy. In contrast, the US still may
loosen the money environment.
First, its economy still faces the difficulty. Nowadays, the real estate industry sees the sign of
becoming stable. However, its consumer sector contributing 70% to GDP is still sluggish.
The growth of real average hourly earning of workers on private non-farm payrolls is
negative, a low level for past thirty years, which also indicates the consumer sector won’t see
a significant recovery. Furthermore, the unemployment rate has reduced from 9.8% in the
same period last year to 8.6% in November this year, but it was attributable to the labor
participation’s reducing 0.5pts to 64%(the lowest since 1983) and temporary seasonal grown
recruitment. Furthermore, other core economies like Europe and Japan are in difficulty and
then America’s trade will be negatively impacted. Plus with the influence by reduced fiscal
stimulating measures, we judge the US’s economy won’t see significant improvement.
Meanwhile, the Obama Administration will fight for 2012Election. Therefore, the US still face
the pressure to loosen the monetary environment.
Second, the debt is huge. America’s public debt has reached up to US$15.17 trillion so far,
and the newly annualized GDP is only US$15.09, so the debt to GDP ratio has also broken
through 100%. Moreover, the U.S. is also burdened with US$117 trillion unfunded liabilities.
Therefore, the U.S. is even facing more severe debt pressure than other economies.
Meanwhile, it also exposed to serious fiscal deficit, with US$1.299 trillion in 2011, just lower
than US$1.41 trillion in 2009. All in all, we think the US’s debt is unsustainable, so it holds
the motion to print more dollars to let the USD depreciate, which may bring about the debt
monetization and stimulate the export, and then alleviate its debt burden and benefit the
economy.
Third, suffered from the crisis and the weak economy, global major economies have
loosened monetary policies again, especially for Europe and others, they may even put
forwards quantitative easing policies. Besides the interest rate hike noted above, the ECB
recently has started three-year LTRO auction and loaned Eur489 billion to banks. As a
matter of fact, the French government has encouraged banks to purchase public debt issued
by countries in the Euro Area with the loan, so it could be deemed the QE policy. What’s
more, China has also cut down the deposit reserve ratio and will ease its monetary policies
moderately. Plus with the loosening policies by the UK and Japan, the political pressure to
put forward a new round of QE for the US has been relieved consumedly.
Last, after this round of European sovereign debt crisis’s spreading to core countries, the US
dollar index has returned to around 80 and may continue the rebound in early 2012, which
may relieve the negative influence over its credit by the depreciation to some extent. After
returning a high level, the dollar will get the space for future depreciation.
What’s more, we think European measures to rescue the financial crisis are more advisable
and reasonable, so the EUR should become stronger than the US dollar in future. In reality,
current global crisis is triggered by structural conflict and economic imbalance, and the
capital is adequate. The market can’t temporarily guide money to suitable sectors or
economies because of the shortage of effective tools. To get out of the crisis, the US only
adheres to printing money. In contrast, the two parties can’t agree on cutting down the fiscal
deficit. Obviously, it is covering up the conflict with more money without the care over the
possibility that flooded liquidity will overflow into other economies and cause the inflation
expectation and social turmoil, which presents its irresponsible attitude. In contrast, the
Europe also prints some money, but it has begun attaching importance to structural
economic problems, and the austerity budget agreement at the latest EU summit proved the
change. Its road to the fiscal union of course won’t be smooth, but it is controlled and to
cultivate a strong sense of discipline, which will lessen the possibility of inflation. In this
regard, we think the depreciation trend of the US dollar won’t change in medium to long term
if it continues the irresponsible behavior, which has been proved by less purchase for the
US’s public debt by foreign holders. Generally speaking, dollar depreciation will benefit gold
and other commodities.
2. Investment demand keeps growing
The world has suffered consecutive economic and financial crisis in past years and faced
more aggravated social turmoil, the investment demand for gold becomes a main cause for
its bullish trend. From 2000 to 2010, the proportion of the demand has risen from 5% to
nearly 40%. In 3Q11, global total demand for gold reached 1053.9 tons, with the increase of
6%, among which the investment demand even rose 33% to 468.1 tons and accounted for
nearly 50%. Apparently, the demand structure of gold has changed materially and the
investment demand has become the important or even the major factor.
3. Reserve demand is enlarging
It is well known that international central banks’ transferring from net seller to net buyer is
also the main reason of higher gold price in past two years. Nowadays international
monetary system is virtually the dollar standard system, meanwhile the euro, the pound
sterling, Japanese Yen and others also help building up the structure. The foundation of the
system lies in the firm and long-term trust on main international currencies by countries with
non-international currency. Once significant change turns out in major countries, other
economies maybe adjust their financial assets. Especially when the basis for the whole
system is vacillated like the breakdown of the Bretton Woods System and the dollar crisis,
the hedging tools including the gold may become the main choice of assets adjustment.
As a matter of fact, we think central governments’ adding gold reserve since 2007 has
proved that current monetary system is buffeted. Each year they have added one
percentage gold reserve since the crisis. From 2008 to October 2011, the gold reserve ratio
has upgraded from 11.1% to 14.2%. Specially, Japan, Russia and India and others have
stored more gold. Therefore, international central banks transferred from net seller in
previous ten years to net buyer for gold in 2010. In 3Q11, they continued increasing the gold
reserve ratio, with net purchase volume reaching up to 148.4 tons. Plus with 129 tons and
69.4 tons bought in 1Q11 and 2Q11, the total net purchase volume has been 346.8tons,
increasing 262% y/y. Furthermore, the demand has accounted around 10% for the total
demand. In our view, nowadays global crisis is still in the danger period, and the conflicts
under current monetary system may deteriorate if global governments can’t figure out
effective means to solve the problems. Therefore, the central banks’ purchase will keep on
or even increase.
4. Physical gold demand faces the chance in emerging economies
Regarding the physical gold demand, China and India have been the two largest buyers for
gold. Because of high inflation and lacking investment tools, the hedging function of gold has
been gradually accepted by the residents. For example, China’s private gold demand has
improved day by day, the CAGR has been 11.3% from 2000 to 2010 for the gold demand
per thousand people and 24.4% from 2006 to 2010. According to WGC, its residential
jewellery demand increased 16.7% y/y to 376.8 tons in 3Q11, and the increase of total
demand was 29.4%, presenting its rapidly growing gold demand.
We still believe China’s physical gold demand enjoys huge room. First, the regulation on
gold market has been loosened and the demand will be released. From the experience in
India, it unloosened the gold import by authorizing banks and governmental agencies, which
let its gold demand rise over 300% by 1998. In China, the import and export for gold had
been restrained by the PBOC before 2003, thereafter the regulation has been unloosened.
By 2010, the four state-owned commercial banks, four shareholding commercial banks and
six enterprises had been authorized to import gold. Therefore, the gold import has speeded
up, and the import volume had increased six times from 35 tons in 2009 to 240 tons in 2010.
According to monthly data by the Census and Statistics Department (Hong Kong), the total
import volume has been 286.8 tons in first ten months this year, increasing 218% y/y. We
estimate total import will be above 400 tons in the whole year in China. Apparently, the gold
demand has burst out.
5. Limited developing space of gold supply
Global gold supply comes from mine production, official sector sales and recycled gold. As
noted above, global central banks have transferred from net seller to net buyer for gold.
Moreover, though gold price has nearly doubled since the crisis, quarterly recycled gold has
maintained at about 400tons, presenting a low correlation between them. What’s more, the
mine production is facing limited increase, downgraded ore grade and higher production
cost.
Currently, global gold stock is limited, with the total storage at 193.6 thousand tons, among
which the gold for jewellery, personal investment, official reserve, underground reserve and
industrial demand is respectively 837, 296, 293, 510, 198 thousand tons. Therefore, the gold
reserve is available to explore for only about 20 years, a little short time.
It is also worth noting that global gold exploration and processing have become more heat
since 2000. However, it becomes more and more difficult to find out new gold mines and the
quantity has declined continually. Plus with more difficult exploit mining, longer investment
cycle and higher cost, the gold supply seems to face a limited developing space.
6. Bullish trend doesn’t end and gold price will rise after the fall in 2012
The EU Summit failed to regain market confidence, the global commodity market recently fell
again, gold price has gone down below $1600, approaching the previous low. However, as
noted above factors, we don’t think the bullish gold trend has finished. Gold price will still
record new high after the fall. It is worth noting that present fundamental situations are like
that in 1980 when gold experienced a rally. Because current financial system is more
complicated, we can’t exclude the possibility that this bullish trend will move further. What’s
more, the price volatility of gold is far lower than that in 1980 and 2008, so we don’t think the
strongest performance in this round of the rise have show up.
C. Active investment into gold stocks
Reviewing the trend of physical gold and gold stocks, the former has performed as we
expected. However, we overestimate gold stocks’ hedging attribute in the weak market.
Meanwhile, the falling profit growth also has dragged down their performance.
Looking forward to 2012, we think gold sector can lead the market. First, the sovereign debt
crisis has encumbered global markets, which may fall in the most danger period in 2012.
However, the reform agreement or effective stimulus plan are expectable to be put forward,
then stock market may keep stable or even rise up. Therefore, gold sector may benefit from
both the recovered stock market and higher gold price. Second, the evaluation of gold stocks
historically have significant premium over that of stock index, with an average over 100%.
Moreover, the evaluation of gold sector in last round trend had kept low for about four years,
and this time the low valuation has begun from 2H07 and lasted over four years. In this
regard, we believe gold stocks will achieve outstanding performance after this round of fall.
Regarding gold stocks, we think Zijin Mining and Zhaojin Mining are worth paying close
attention. Now the valuation premium of the former is at historical level. The negative effect
of its pollution incidents has been digested largely. Meanwhile, it enjoys low cost advantage
and plans to take active acquisitions overseas, which will let it realize high growth. Regarding
the latter, as the leader of gold stocks, Zhaojin Mining has accumulated gold reserve
continually. Moreover, as a pure-gold manufacturer, it can more benefit more from rising gold
price.
In past two years, the performance of the small and medium cap gold stocks has been
sluggish. However, the companies with high growth or increasing resource reserves have
won better performance. Therefore, we recommend China Gold International Resources（
2099.HK）. Its profit has been under expectation because of lower dressed ore grade, but if
mining is conducted on different rock stratum, the possibility of grade rise will increase and
its cost will get lower. Furthermore, it is backed by China National Gold Group (CNG), it is
the group’s only overseas resource integrating platform, and the group grants CGIR
preemptive right for acquisition opportunity of the international mining industry. Therefore, it
can take strategic acquisitions sourced from the international project pipeline of the Group.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
A. Precious Metals prices have spiraled up in 2011
Looking back to 2011, international gold price has kept spiraling up with three stages. First,
gold price increased 5.5% in 1H11 from US$1421.55/Oz at the end of 2010 to about
US$1500/Oz in late June, which is mainly attributable to the USD depreciated for the QE2
and worsening European sovereign debt crisis. Second, as we expected in 2H11 report, gold
price had speeded up since July and recorded a new high of US$1920.38/Oz, because the
rating for the U.S. was downgraded and European sovereign debt crisis spread to core
economies. Last, gold price has plumped since September and the trend has gone down to
the end of this year, when the price has fallen down US$1600. In sum, gold price has
advanced around 8% in the whole year.
In our view, recent decline has been mainly caused by the tightening liquidity for the
Sovereign debt crisis. According to LBMA, the gold lease rate stands at the low level
compared to that in past ten years. While the US dollar is in shortage, banks may borrow the
dollar but lend their gold, then the gold lease volume ramped temporarily, so the gold supply
becomes bigger, which let the lease rate hit maintain low. Therefore, the hedging attribute of
the gold is ignored temporarily.
Compared to about 8% increase of gold price, global gold stocks have lagged behind in
2011 and only a few like Newmont、GOLD FIELDS and other leading companies have
realized a rise. Meanwhile, all gold shares listed in HK have experienced the drop, among
which only China Precious Metals（1194.HK） and Zhaojin Mining（1818.HK）performed
comparatively better, with about 21% drop. The worst performer are China Gold International
Resources（2099.HK） and Lingbao Gold（3330.HK） who have lost nearly 60%. We think
the first reason for their weak performance is the sluggish stock market. In 2011, besides the
U.S. market, stock markets of Europe, Japan and emerging economies have fallen at large,
and the HSI even has been cut down nearly 20%. What’s more, largely increased cost has
eaten some profit of gold sector instead of higher gold price. Therefore, its profit growth
becomes lower and shows unsatisfied prospect. What’s more, with the government’s more
care on economic structural reform, the environment factor becomes more important, so
some gold manufacturers also perform badly for negative environmental incident. For
example, Zijin Mining (2899.HK), a leading gold enterprise, has also lost 37%.
B. Gold price may rise after the fall in 2012
1. Tightening or loosening monetary policies?
Flooded liquidity has been the main reason for the bullish gold since 2000. Within ten years,
major economies like the US and China has printed money as much as or more than that
printed in previous decades or hundreds of years. When economic growth slows down or
even falls into depression because of the European sovereign debt crisis, major economies
have begun loosening their monetary policies. For example, Brazil, Australia and the ECB
have adjusted downwards the benchmark interest rate, other smaller economies like
Indonesia have even cut down the rate more often. Moreover, because of the high inflation,
many economies have fallen into negative real interest, so the opportunity cost for gold is
very low. Historically, easing monetary policies normally benefited the gold price.
Looking forward to 2012, we still think monetary environment will be more loosening. Though
the expectation to raise interest rate comes forth for better economic data in the US, we still
think it doesn’t have the motion to tighten its monetary policy. In contrast, the US still may
loosen the money environment.
First, its economy still faces the difficulty. Nowadays, the real estate industry sees the sign of
becoming stable. However, its consumer sector contributing 70% to GDP is still sluggish.
The growth of real average hourly earning of workers on private non-farm payrolls is
negative, a low level for past thirty years, which also indicates the consumer sector won’t see
a significant recovery. Furthermore, the unemployment rate has reduced from 9.8% in the
same period last year to 8.6% in November this year, but it was attributable to the labor
participation’s reducing 0.5pts to 64%(the lowest since 1983) and temporary seasonal grown
recruitment. Furthermore, other core economies like Europe and Japan are in difficulty and
then America’s trade will be negatively impacted. Plus with the influence by reduced fiscal
stimulating measures, we judge the US’s economy won’t see significant improvement.
Meanwhile, the Obama Administration will fight for 2012Election. Therefore, the US still face
the pressure to loosen the monetary environment.
Second, the debt is huge. America’s public debt has reached up to US$15.17 trillion so far,
and the newly annualized GDP is only US$15.09, so the debt to GDP ratio has also broken
through 100%. Moreover, the U.S. is also burdened with US$117 trillion unfunded liabilities.
Therefore, the U.S. is even facing more severe debt pressure than other economies.
Meanwhile, it also exposed to serious fiscal deficit, with US$1.299 trillion in 2011, just lower
than US$1.41 trillion in 2009. All in all, we think the US’s debt is unsustainable, so it holds
the motion to print more dollars to let the USD depreciate, which may bring about the debt
monetization and stimulate the export, and then alleviate its debt burden and benefit the
economy.
Third, suffered from the crisis and the weak economy, global major economies have
loosened monetary policies again, especially for Europe and others, they may even put
forwards quantitative easing policies. Besides the interest rate hike noted above, the ECB
recently has started three-year LTRO auction and loaned Eur489 billion to banks. As a
matter of fact, the French government has encouraged banks to purchase public debt issued
by countries in the Euro Area with the loan, so it could be deemed the QE policy. What’s
more, China has also cut down the deposit reserve ratio and will ease its monetary policies
moderately. Plus with the loosening policies by the UK and Japan, the political pressure to
put forward a new round of QE for the US has been relieved consumedly.
Last, after this round of European sovereign debt crisis’s spreading to core countries, the US
dollar index has returned to around 80 and may continue the rebound in early 2012, which
may relieve the negative influence over its credit by the depreciation to some extent. After
returning a high level, the dollar will get the space for future depreciation.
What’s more, we think European measures to rescue the financial crisis are more advisable
and reasonable, so the EUR should become stronger than the US dollar in future. In reality,
current global crisis is triggered by structural conflict and economic imbalance, and the
capital is adequate. The market can’t temporarily guide money to suitable sectors or
economies because of the shortage of effective tools. To get out of the crisis, the US only
adheres to printing money. In contrast, the two parties can’t agree on cutting down the fiscal
deficit. Obviously, it is covering up the conflict with more money without the care over the
possibility that flooded liquidity will overflow into other economies and cause the inflation
expectation and social turmoil, which presents its irresponsible attitude. In contrast, the
Europe also prints some money, but it has begun attaching importance to structural
economic problems, and the austerity budget agreement at the latest EU summit proved the
change. Its road to the fiscal union of course won’t be smooth, but it is controlled and to
cultivate a strong sense of discipline, which will lessen the possibility of inflation. In this
regard, we think the depreciation trend of the US dollar won’t change in medium to long term
if it continues the irresponsible behavior, which has been proved by less purchase for the
US’s public debt by foreign holders. Generally speaking, dollar depreciation will benefit gold
and other commodities.
2. Investment demand keeps growing
The world has suffered consecutive economic and financial crisis in past years and faced
more aggravated social turmoil, the investment demand for gold becomes a main cause for
its bullish trend. From 2000 to 2010, the proportion of the demand has risen from 5% to
nearly 40%. In 3Q11, global total demand for gold reached 1053.9 tons, with the increase of
6%, among which the investment demand even rose 33% to 468.1 tons and accounted for
nearly 50%. Apparently, the demand structure of gold has changed materially and the
investment demand has become the important or even the major factor.
3. Reserve demand is enlarging
It is well known that international central banks’ transferring from net seller to net buyer is
also the main reason of higher gold price in past two years. Nowadays international
monetary system is virtually the dollar standard system, meanwhile the euro, the pound
sterling, Japanese Yen and others also help building up the structure. The foundation of the
system lies in the firm and long-term trust on main international currencies by countries with
non-international currency. Once significant change turns out in major countries, other
economies maybe adjust their financial assets. Especially when the basis for the whole
system is vacillated like the breakdown of the Bretton Woods System and the dollar crisis,
the hedging tools including the gold may become the main choice of assets adjustment.
As a matter of fact, we think central governments’ adding gold reserve since 2007 has
proved that current monetary system is buffeted. Each year they have added one
percentage gold reserve since the crisis. From 2008 to October 2011, the gold reserve ratio
has upgraded from 11.1% to 14.2%. Specially, Japan, Russia and India and others have
stored more gold. Therefore, international central banks transferred from net seller in
previous ten years to net buyer for gold in 2010. In 3Q11, they continued increasing the gold
reserve ratio, with net purchase volume reaching up to 148.4 tons. Plus with 129 tons and
69.4 tons bought in 1Q11 and 2Q11, the total net purchase volume has been 346.8tons,
increasing 262% y/y. Furthermore, the demand has accounted around 10% for the total
demand. In our view, nowadays global crisis is still in the danger period, and the conflicts
under current monetary system may deteriorate if global governments can’t figure out
effective means to solve the problems. Therefore, the central banks’ purchase will keep on
or even increase.
4. Physical gold demand faces the chance in emerging economies
Regarding the physical gold demand, China and India have been the two largest buyers for
gold. Because of high inflation and lacking investment tools, the hedging function of gold has
been gradually accepted by the residents. For example, China’s private gold demand has
improved day by day, the CAGR has been 11.3% from 2000 to 2010 for the gold demand
per thousand people and 24.4% from 2006 to 2010. According to WGC, its residential
jewellery demand increased 16.7% y/y to 376.8 tons in 3Q11, and the increase of total
demand was 29.4%, presenting its rapidly growing gold demand.
We still believe China’s physical gold demand enjoys huge room. First, the regulation on
gold market has been loosened and the demand will be released. From the experience in
India, it unloosened the gold import by authorizing banks and governmental agencies, which
let its gold demand rise over 300% by 1998. In China, the import and export for gold had
been restrained by the PBOC before 2003, thereafter the regulation has been unloosened.
By 2010, the four state-owned commercial banks, four shareholding commercial banks and
six enterprises had been authorized to import gold. Therefore, the gold import has speeded
up, and the import volume had increased six times from 35 tons in 2009 to 240 tons in 2010.
According to monthly data by the Census and Statistics Department (Hong Kong), the total
import volume has been 286.8 tons in first ten months this year, increasing 218% y/y. We
estimate total import will be above 400 tons in the whole year in China. Apparently, the gold
demand has burst out.
5. Limited developing space of gold supply
Global gold supply comes from mine production, official sector sales and recycled gold. As
noted above, global central banks have transferred from net seller to net buyer for gold.
Moreover, though gold price has nearly doubled since the crisis, quarterly recycled gold has
maintained at about 400tons, presenting a low correlation between them. What’s more, the
mine production is facing limited increase, downgraded ore grade and higher production
cost.
Currently, global gold stock is limited, with the total storage at 193.6 thousand tons, among
which the gold for jewellery, personal investment, official reserve, underground reserve and
industrial demand is respectively 837, 296, 293, 510, 198 thousand tons. Therefore, the gold
reserve is available to explore for only about 20 years, a little short time.
It is also worth noting that global gold exploration and processing have become more heat
since 2000. However, it becomes more and more difficult to find out new gold mines and the
quantity has declined continually. Plus with more difficult exploit mining, longer investment
cycle and higher cost, the gold supply seems to face a limited developing space.
6. Bullish trend doesn’t end and gold price will rise after the fall in 2012
The EU Summit failed to regain market confidence, the global commodity market recently fell
again, gold price has gone down below $1600, approaching the previous low. However, as
noted above factors, we don’t think the bullish gold trend has finished. Gold price will still
record new high after the fall. It is worth noting that present fundamental situations are like
that in 1980 when gold experienced a rally. Because current financial system is more
complicated, we can’t exclude the possibility that this bullish trend will move further. What’s
more, the price volatility of gold is far lower than that in 1980 and 2008, so we don’t think the
strongest performance in this round of the rise have show up.
C. Active investment into gold stocks
Reviewing the trend of physical gold and gold stocks, the former has performed as we
expected. However, we overestimate gold stocks’ hedging attribute in the weak market.
Meanwhile, the falling profit growth also has dragged down their performance.
Looking forward to 2012, we think gold sector can lead the market. First, the sovereign debt
crisis has encumbered global markets, which may fall in the most danger period in 2012.
However, the reform agreement or effective stimulus plan are expectable to be put forward,
then stock market may keep stable or even rise up. Therefore, gold sector may benefit from
both the recovered stock market and higher gold price. Second, the evaluation of gold stocks
historically have significant premium over that of stock index, with an average over 100%.
Moreover, the evaluation of gold sector in last round trend had kept low for about four years,
and this time the low valuation has begun from 2H07 and lasted over four years. In this
regard, we believe gold stocks will achieve outstanding performance after this round of fall.
Regarding gold stocks, we think Zijin Mining and Zhaojin Mining are worth paying close
attention. Now the valuation premium of the former is at historical level. The negative effect
of its pollution incidents has been digested largely. Meanwhile, it enjoys low cost advantage
and plans to take active acquisitions overseas, which will let it realize high growth. Regarding
the latter, as the leader of gold stocks, Zhaojin Mining has accumulated gold reserve
continually. Moreover, as a pure-gold manufacturer, it can more benefit more from rising gold
price.
In past two years, the performance of the small and medium cap gold stocks has been
sluggish. However, the companies with high growth or increasing resource reserves have
won better performance. Therefore, we recommend China Gold International Resources（
2099.HK）. Its profit has been under expectation because of lower dressed ore grade, but if
mining is conducted on different rock stratum, the possibility of grade rise will increase and
its cost will get lower. Furthermore, it is backed by China National Gold Group (CNG), it is
the group’s only overseas resource integrating platform, and the group grants CGIR
preemptive right for acquisition opportunity of the international mining industry. Therefore, it
can take strategic acquisitions sourced from the international project pipeline of the Group.
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