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3 Reasons Why Gold Stocks May Outperform

February 01, 2012 | About:

The strongest performing asset class of 2012 has been gold. This leaves many investors to wonder whether gold mining stocks are attractive for the remainder of the year.

There have been a number of positive developments in the precious metals industry over the last month.

First of all, Pan American Silver (NASDAQ:PAAS) acquired Minefinders (MFN). In 2011, institutional investors favored gold stocks such as Newmont (NYSE:NEM) or Goldcorp (NYSE:GG). Subsequently, smaller gold stocks and exploration stocks were beaten down. Pension funds simply favored buying the gold ETF (GLD) and large cap gold stocks. However, it is now expected that the large gold companies will make significant acquisitions of companies with production that will soon come on stream.

Secondly, all fund managers are aware that gold has been in a bull market for 11 years. There was some concern that the bull market was over as gold breached its 200-day moving average. As the price of bullion has risen sharply to $1750 there are fewer fears that the gold bull market is over. The fact that gold posted an 11.2% gain in January only to be outdone by silver at 20% means that hedge fund managers are paying attention to the sector once again.

Finally, when the Federal Reserve announced that interest rates would remain negative until 2014, many investors moved into gold. Gold is not necessarily an inflation or deflation hedge but rather a preferred asset class when interest rates are negative. Bernanke has all but guaranteed that negative interest rates are here to stay for the foreseeable future.

The question is whether the strong gold bullion performance will translate to gold stocks? Thus far, over the last 11 years, investors have preferred GLD to owning gold stocks. The companies have also underperformed because costs have risen in accordance with the price of bullion. Most shrewd money managers know that gold mining is rife with risks including political, environmental and operational risks. Consequently, money managers have simply used gold ETFs and avoided gold stocks.

Perhaps, due to the three factors discussed above, investors will start to allocate more of their portfolio to gold stocks in 2012.

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