Gold bars
Gold producers are moving higher and helping to pare losses within the S&P/TSX composite index. Are investors hoping for another round of quantitative easing from the U.S. Federal Reserve? Maybe. But gold itself isn't doing much, rising all of $1.50, to $1,716 (U.S.) an ounce. More likely, investors love what hedge fund manager David Einhorn is saying about gold producers.
According to Bloomberg News, Mr. Einhorn said in a conference call that Greenlight Capital Re Ltd. – where he serves as chairman – has cut its holding of gold in the third quarter but ramped up its holdings of gold producers, through the Market Vectors Gold Miners exchange traded fund.
As Bloomberg pointed out, the ETF fell 5.4 per cent in the second and third quarters of 2011, while the price of gold itself rose 11 per cent – a discrepancy that could be bad news for gold or good news for producers. Mr. Einhorn is acting on the latter view.
"A substantial disconnect has developed between the price of gold and the mining companies," he said. "With gold at today's price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further."
And: "Since we believe gold will continue to rise, we expect gold stocks to do even better."
So far, so good. Canadian gold producers shot higher in afternoon trading. Barrick Gold Corp. was recently spotted up 2.8 per cent and Goldcorp Inc. was up 3.4 per cent.
At the end of the second quarter, Greenlight was already a big investor in the Market Vectors Gold Miners ETF, though, with about 3.5 million units -- the fund's third biggest holding.
David Berman