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Equities offer far greater leverage in a rising gold market, and share prices are already on the move

Gold has been the traditional safe haven throughout the ages

Ariana Resources PLC -

The gold price has hit record highs in several currencies in recent days, including the British pound, Canadian dollar, South African rand, and Australian dollar. It’s also recovered much of the ground lost in US dollar terms when investors sold heavily to cover losses elsewhere in the market. That selling is now abating, and the buyers are coming in for gold again, seeking the traditional safe haven.

That means that the companies that find and produce the gold are set to benefit too, a process which is already getting underway.

For those that are able to continue production and development work – and at this stage there are many – a high gold price combined with ongoing low fuel prices means that the opportunities for wider margins are considerable.

Among those companies who’ve already made this explicit is Ariana Resources PLC (LON:AAU), which said on 19 March that while precautionary measures have been taken against the spread of coronavirus at its operations, no disruption to production from its Kiziltepe mine is expected. Trans-Siberian Gold (LON:TSG) was also earl off the mark, issuing a release on 20 March that spurred a 25% increase in the company’s share price, as it pointed out the significant drop in input costs.

Other companies that have followed include Resolute Mining Ltd (LON:RSG)(ASX:RSG) , which on 26 March stated that it’s continuing with production at its African projects; Anglo Asian Mining PLC (LON:AAZ), which stated that production at its mines in Azerbaijan is continuing; Caledonia Mining Corporation PLC (NYSEAMERICAN:CMCL)(LON:CMCL)(TSE:CAL), which said that production at the Blanket mine in Zimbabwe remains on track.

Among the explorers and developers, many companies remain in operation, most notably Greatland Gold (LON:GGP), which has seen significant interest in its shares in recent days, as investors buy into the potential for a major re-rating if Newcrest takes an early development decision there. Gold above US$1,600 and set to head higher certainly can’t hurt that decision-making process.

Other companies likely to benefit from a prolonged period of gold price strength include Baker Steel Resources Investment Trust (LON:BSRT), which has significant gold investments in Russia, Africa and Asia, and Chaarat Gold Holdings Ltd (LON:CGH), which has production in Armenia and development projects in Central Asia.

But why is it worth looking at these companies, rather than just taking a speculative position in a gold ETF?

The answer is that the leverage to the upside is greater, albeit that the risk is too. With a gold ETF you don’t get the benefits to margin of lower oil prices and higher gold prices – all you get are the daily moves in the price itself. Thus, a rise in the gold price such as we’ve seen in the past couple of weeks, as gold moved from below US$1,500 to above US$1,600 amounts to a rise of slightly less than 7%.

On the other hand though, the Trans-Siberian gold share price rose more than 25% on its margin-based announcement, and the price could go still higher as investors start to come back to gold equities.

Greatland Gold’s share price has also jumped by more than 20% over the past few days, albeit that they are down on where they were in February before the coronavirus infected markets.

Meanwhile, at the larger end of the market, shares in precious metals producer Polymetal (LON:POLY), currently worth well over £5bn, have jumped by 33% since a six-month low of 1,039p was hit on 19 March. That’s a stunning jump for a company so large, but it’s by no means unique.

The US$48bn Barrick Gold (NYSE:GOLD)(TSE:ABX) has enjoyed a 25% jump in its share price since six month lows hit a week ago. That kind of action just doesn’t happen on the gold market itself, however wild the commodities markets are at the moment.

And it means that those on the lookout for big gains will always still look to the gold equity markets.

Quick facts: Greatland Gold PLC

Price: 12.386 GBX

AIM:GGP
Market: AIM
Market Cap: £467.47 m
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