Surging gold prices may benefit Canadas junior mining companies, helping to pay off the high costs of exploration and potentially providing an investment gold mine for those with a strong appetite for risk, analysts said.
Gold pushed up against record highs again on Friday, trading near $1,250 US an ounce, as the sovereign debt crisis in Europe sent investors in search of a safe haven. That trend may continue as doubts persist over Europes ability to solve its problems and the potential knock on effect on global stability.
The rise in the price of the precious metal has taken mining stocks up with it, with the S&P/TSX Global Gold Index up 12% since the start of the year. Barrick Gold, the worlds biggest gold company, has also risen close to 12%, while smaller New Gold is up about 65%.
The most exciting prospects are in the exploration field, said John Ing, president and gold analyst at Maison Placements Canada. A lot of juniors have the cash flow and are out there looking for every missed opportunity.
He points out that even a small find can make a big difference to a junior miner, while the big companies struggle just to replenish existing reserves and that limits upside in their share prices.
Canada and the U.S. are among the favored destinations gold prospecting. More than 70% of junior miners tracked by research and analysis company Zeal LLC, have at least one project underway in North America.
And thats also good news for investors as it helps to reduce some of the political risk that can be associated with investing in more exotic locations. In 2006 for example, Newmont Mining had gold and assets seized after a tax dispute with Uzbekistan.
Another potential upside for the share prices is the prospect of mergers and acquisitions. According to a report earlier this year from PriceWaterhouse Coopers, M&A in Canada is being driven by the resources sector, with major companies seeking to acquisitions to replenish reserves and smaller companies with proven resources seeking partners to help finance development and extraction.
The number of deals closed jumped 61% it said, and the upward trend is likely to continue.
However, investing in mining stocks should not be seen as an alternative to bullion and the rationale of a safe haven investment and a hedge against inflation is not the same, advisors said.
With stocks you have risks, such as poor company management, or factors such as higher oil prices that can affect production costs, said Arnold Zwaig, a director and senior wealth advisor at Scotia McLeod in Montreal.
Richard Briggs, a senior market strategist at Lind-Waldock Canada agreed.
You can hit a winning gold market, but still lose out through a bad stock, he said.
Still, given the current global instability most advisors agree that investors should have some exposure to gold in their portfolios, whether through buying the physical asset or through Exchange Traded Funds, which help spread risk.
Everyone should have some gold, and if you dont you should probably think about getting some, Briggs said. Just dont mortgage the farm to do it.
