Gold stocks discount lower gold price

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Michael Curran, an analyst at RBC Dominion Securities Inc., is bullish on gold and gold equities, and you can see why. Whereas gold trades at about $1240 (U.S.) an ounce right now, gold equities are discounting considerably lower prices for the commodity, leaving plenty of upside potential.

According to his figures, the average discounted gold price among North American Tier 1 producers is $915 an ounce. In other words, the stock prices assume that the long-term price of gold will tumble about 26 per cent from the current level. Yamana Gold Inc. has the lowest discounted gold price, at $780 an ounce. Newmont Mining Corp. has the highest discounted gold price, at $1017 an ounce. Barrick Gold Corp. is near the average, at $904 an ounce.

If the discounted gold price were to narrow the gap with the actual, current price - say, to $1,200 an ounce - then share prices would rise considerably. In fact, the average pop would be 55 per cent. Even with a discounted price of just $1,000 an ounce, the average share price would rise 17 per cent.

According to Mr. Curran, the spot gold price is set to move higher. Over the past 30 years, November and December have traditionally been strong months for the price of gold, and this year shouldn't be an exception, given the ongoing geopolitical uncertainty and low interest rates. In the second half of this year, he estimates that gold will trade between $1,175 and $1,300 an ounce.

"In the longer term, we look for spot gold to test a new and higher trading range of $1,300/oz to $1,400/oz in mid-2011 to 2012, driven by growing inflation expectations after the global economy has recovered fully," he said in a note.

"Our recommendation in the larger-cap space is to focus on quality, investing in established names with lower-cost operations, proven management teams and future growth potential. Among the Tier 1 producers, we prefer Barrick Gold and Goldcorp Inc...."

There are risks, of course - and these risks arise if the economy is either too good or too bad. That is, if the economy springs back to life and central banks raise interest rates sooner than expected, gold prices will probably suffer. On the other hand, gold prices could also decline in a deflationary environment.