Gold mining equities 'have 30%-40% upside to come'

Gold mining equities are poised to climb a further 30%-40% before they are fully valued, according to Investec Asset Management's Bradley George.

The manager of the £182m Investec Global Gold fund says the soaring rise in the price of the precious metal itself had not been reflected in gold mining shares.

George says: "We believe we have still got a way to go with around 30% to 40% upside.

"The margins are bigger than ever, but despite this the market is not giving full credit to these companies. So we think there is an opportunity for investment in gold equities and see value in the companies generating free cashflow, rather than the commodity itself."

The commodity has risen 175% in sterling terms over the last five years, peaking earlier this month at $1,434 per troy ounce.

Gold equities have lagged this significantly, with the FTSE Gold Mines index up just 75% over the same period.

Evy Hambro, manager of the £2.9bn BlackRock Gold & General fund, says share prices had disconnected from their historic relationship with the gold price.

He says: "Gold shares are down around 10% in sterling terms since the start of the year, while the gold price is down about 3%. That is a material difference and you would not expect that given recent correlations."

Neil Gregson, portfolio manager on the £2.8bn J.P. Morgan Natural Resources fund headed by Ian Henderson, adds: "Gold shares have performed very poorly given the performance of gold. In particular mid- and small- cap companies have seen a big correction so there are lots of opportunities."

Managers expect the gold price itself to remain range-bound following the 25% jump in price seen in the past 12 months.

Hambro says: "My central view is the gold price is trading in line with fundamentals in the sector.

"Central banks have been accumulators for the last three years, while the supply of gold remained flat, jewellery demand over the past 24 months has increased, and we do not see anything disrupting that within the gold market."

Gregson adds: "We think it will be range-bound in the near term. It has performed very well as conditions have been supportive, but there are now more headwinds growing."

(Source: http://www.investmentweek.co.uk/investment-week/news/2035568/gold-mining-equities-upside-investecs-george)