Gold bullion has bro-ken through the US$1,349-an-ounce level, thanks to strong investment demand that is being driven by mounting fears of inflation resulting from the trillions of dollars that have been spent to stimulate world economies. Although precious metal fund managers are selective about their stock picks, they are bullish about the prospects for both the sector and the shiny metal itself.

“When we are asked for our gold price outlook, we’re agnostic, whether it means coming up with a US$2,000 price or a US$1,500 price,” says Chris Beer, senior portfolio manager of RBC Global Precious Metals Fund and vice president of Toronto-based RBC Global Asset Management. “We look at the factors that move the gold price, and pretty much all of them are positive.”

Beer notes that in the past 40 years, there has been a 20%-30% correlation between the U.S. dollar and gold bullion, or inflation and gold. “But if you looked at certain periods,” he adds, “such as 1980 to 1996, the correlation between gold and the US$ was fairly high.” During that period, as interest rates went up, gold went down; alternatively, the US$ declined while gold rose.

Today, the situation is more complex because a host of factors are at play, including the US$, global money supply, interest rates and mounting sovereign debt.

“The point is: more and more investors are looking at gold as an asset class that governments cannot debase, or influence, other than through deficit spending,” says Beer, pointing to the dramatic growth in the past decade of exchange-traded funds that hold bullion or precious metals stocks. “This [trend] will convince the world that gold is not a bad hedge against government [policies].”

To aggravate matters, many governments are running high fiscal deficits. “They are printing 5%- 13% more money every year,” says Brahm Spilfogel, who co-manages the fund with Beer and is a vice president with RBCGAM. “You have a relatively stable inventory of gold production. Implicitly, all hard assets — but, in particular, gold — should rise. But what that precise amount will be, we don’t know.”

Should governments start to control fiscal deficits sometime in the future, it would put downward pressure on gold bullion.

“Until that happens, investor demand is going to creep up,” says Spilfogel. “We are not sure if we are going to see that fiscal resolve on a global basis. But one thing is certain: more money is flowing into gold bullion, mutual funds and ETFs.”

Beer and Spilfogel divide the RBC fund’s 120-name portfolio across the market-cap spectrum, with roughly equal proportions of large-, mid- and small-cap stocks.

One of the larger positions in the small-cap category is Colossus Minerals Inc., which is developing the Serra Pelada project in Brazil to mine gold, platinum and palladium. “[Colossus] has a strong management team and the company is fully financed,” says Beer. “There is some project risk, but we think it could produce 300,000 ounces of gold a year, starting in 2012. But it could also be in the latter part of 2011.”

Acquired four years ago, at about $1 a share, Colossus stock is now trading around $8.40. Beer has a target of $16 a share within a year.

Another long-time favourite is Goldcorp Inc., the largest holding in the RBC fund. “[Its] cash flow, while strong, has been dedicated to building mines,” says Beer, noting that this senior producer has grown rapidly in the past decade through acquisition. “[Goldcorp] just announced production at [its] Penasquito mine in Mexico. People were not sure the mine would work properly. So far, so good. And if gold goes up by 10% a year, then you will get more leverage in the stock.”

Although Goldcorp’s share price is about $44 and has been relatively flat for the past year, Beer has a 12-month target of around $52-$54 a share.



Equally bullish about the bullion price is Ani Markova, portfolio manager with Toronto-based AGF Investments Inc., who oversees AGF Precious Metals Fund.

“We’re in a multi-year bull run for gold,” she says. “If you look back to the 1800s, the shortest [bull] cycle was 10 years. This cycle will be even longer because we are undergoing some fundamental macro reforms on the credit and financial structure side that involve all countries — and all currencies.”

Although inflation historically has been regarded as a prime factor driving the bullion price, it’s in the background this time, Markova adds: “Although the bond market is telling us there is no fear of inflation, if you look at what governments are doing, it is very reflationary in the long run. The fear is that governments will not remove the stimulus quickly enough, for political reasons, before they can control a very fast ramp-up of inflation. It all depends on how quickly politicians respond.”

Markova believes that gold will continue to attract investors, as weakness in the U.S. economy is currently putting a lot of pressure on the U.S. Federal Reserve Board to use quantitative easing — to print more money. Moreover, the gold price is also heating up because autumn is the season when buyers in India acquire gold jewelry for the autumn wedding season.

“Culturally, India has been the main driver,” says Markova. “Until recently, India has been the largest buyer of physical gold used for jewelry for dowries.”@page_break@Gold could go north of US$2,000 an ounce within the next few years, says Markova, and it will do so very gradually. “We’re not solving any of the problems that exist in the financial structures of the world,” she says, adding that so far, there has not been the kind of exuberance for buying bullion that was witnessed in the 1980s.

“We’re slowly building the base,” she says, “and it will continue for several years until we resolve the funding issues that countries are facing. This gives me confidence to believe that we will be faced with more currency devaluations.”

A growth-at-a-reasonable-price investor, Markova shares portfolio-management duties with Bob Lyon, senior vice president at AGF. They are a running a portfolio with about 100 names. Currently, 40% of the AGF fund’s assets under management is in large-cap firms such as Goldcorp and Randgold Resources Ltd. But the remaining 60% is in mid-tier and small-cap firms that are often active outside Canada and have the potential to become much larger.

One small-cap holding is Am-pella Mining Ltd, an Australia-based exploration firm that is developing a promising new mine in Burkina Faso. Markova says Ampella has 1.2 million ounces of so-called “inferred” resources, which have to be proven with further drilling. “Everything I’ve seen so far gives me the comfort that there are a lot of ounces to be found,” she says. “And [the company has] the right people who can deliver.”

Bought in early 2010 at around AUS$1 ($0.96) a share, Ampella’s stock is now trading around AUS$2.70. Markova believes the stock could be worth three or four times more within 18 to 24 months: “It depends on its exploration success.”

On the large-cap side, Markova favours Eldorado Gold Corp., a senior producer active in China, Brazil and Turkey: “[Eldorado is] employing the right strategy, running good assets at low costs. I don’t think there is anybody in this industry that can grow production from 350,000 ounces in 2009 to one million ounces by 2012 and still have sub-$350 an ounce cash costs.”

A long-term holding, Eldorado’s stock is trading around $20.10 a share, or 14 times next year’s enterprise value to EBITDA (earnings before interest, taxes, depreciation and amortization).

Although the stock is trading at a premium multiple, Markova believes it is justifiable. “It’s a quality name,” she says, adding the stock has about 50% upside over the next 24 months. “I have confidence that [Eldorado] will continue to deliver.”



It’s not surprising that gold is breaking new price records, says Paul Wong, manager of Altamira Precious & Strategic Metal Fund and vice president of Natcan Investment Management Inc. in Toronto. He points to leading indicators tracked by the New York-based Economic Cycle Research Institute that show the U.S. economy began to slow appreciably this past May.

“It looks as if the U.S. economy is heading down,” he says, “if not into a double-dip [recession], then a very slow economy. You’re starting to hear people talk about QE2 — quantitative easing, Part 2. There is a risk of a double-dip, and we could go into a deflationary scenario.”

He adds that economic growth will remain at subpar levels for several years as Americans spend less and rebuild their savings after the 2008 financial crisis.

Although the gold bullion price had barely moved over the summer, Wong argues that it was simply building a base. “Now, we’re heading higher and gold will probably clear US$1,300-US$1,350 by the end of October,” he says, adding that the U.S. mid-term elections will stir worries about that country’s economy and possibly divert anxious investors to bullion. “If you look at the seasonal patterns, gold does tend to spike in August and again in October.”

With a concentrated portfolio of 40 names, the Altamira fund has about 28% of its AUM in large- and mid-cap producers, 41% in junior producers and developers, and 27% in exploration plays (plus about 3% in miscellaneous sectors such as platinum).

One favourite name in the second category is Allied Nevada Gold Corp. That firm operates a low-grade, open-pit mine in Nevada, but also has found a promising region a little south of its Hycroft mine in the area. “[Allied Nevada is] still delineating [the potential site],” says Wong. “But, so far, it looks like [the new site] will have a higher-grade mine.”

Allied Nevada produces about 100,000 ounces of gold a year, although it might raise its annual output to 500,000 ounces within about three years. The company’s stock is trading at about $28.20 a share. Wong has a $35 target within 12 months.

Another favourite is Romarco Minerals Inc. This Toronto-based exploration firm is developing the Haile gold mine in South Carolina. Recently, Romarco announced that it had identified a so-called “bonanza-grade” — very high-grade — ore in the upper portions of the mine. “Importantly, they can mine it at very low cost,” says Wong, noting the so-called “cash cost” of mining the site is about US$300-US$350 an ounce. “The story has been developing over the past few years; and, every step, it’s getting bigger and bigger.”

Romarco plans to start production in 2013 with a target of 250,000 ounces of gold annually. By 2014, it will increase that to 350,000 ounces and could hit 500,000 ounces by 2015.

Acquired in mid-2009, at about $0.60 a share, Romarco’s TSX Venture Exchange-listed stock is trading at about $2.50. Wong believes it could double within 12 to 18 months: “Unless [it gets] taken out [in a takeover] before then.” IE