Could this year be the year for Australian-listed gold miners to shine after they took a bloody beating that left them a shadow of their former selves?
Many of our precious metal producers have started to strongly outperform in the past two months and this is probably only the tip of the iceberg.
Australia's largest gold miner Newcrest Mining Limited (ASX: NCM) is up by a third, while smaller peers like Regis Resources Limited (ASX: RRL) and Doray Minerals Limited (ASX: DRM) are up by over 50% since early November.
Ramelius Resources Limited (ASX: RMS) is the latest to give the market something to cheer about with the stock surging 25% to a six-month high of 7.6 cents in lunch time trade on better than expected gold production at its Mt Magnet operation and management's promise of lower costs.
The turn in investor sentiment towards the sector is a refreshing change, but there's plenty of room left for gold stocks to climb before the sector starts to look "fully priced".
Not only is the S&P/ASX All Ords Gold (Index: ^AXGD) (ASX: XGD) down 60% over the last two years compared with a near 14% gain for the All Ordinaries (Index: ^AORD) (ASX: XAO) benchmark, many profitable gold producers continue to trade at big discounts to their net tangible asset (NTA) value.
The discount to NTA reflects the total lack of confidence towards the viability of the sector with skepticism that gold can hold above $US1000 an ounce.
However, I think the gold price has found its feet despite talk that rising interest rates in the United States later this year will trigger another downturn for the commodity.
The fact is, this risk is well flagged and there have been plenty of opportunities for gold to slump below $US1000 an ounce in the last 18 months.
Gold has withstood the headwinds and negative sentiment and has held its ground at around $US1100 an ounce and it could run higher in the coming months.
Foster Stockbroking noted that the three-month gold forward rate (futures pricing for gold for delivery in three-months) is lower than the current spot price. This is very unusual for gold as the price of gold for future delivery is typically higher to reflect holding costs.
The higher spot price to future price usually coincides with gold price rallies, according to the broker.
Those looking to capitalize on this potential trend may be better served by investing in miners with majority local operations.
While gold priced in US dollars has bounced in recent months, the commodity has pulled even further ahead when priced in Australian dollars due to the exchange rate.
Miners like Saracen Mineral Holdings Limited (ASX: SAR) and Silver Lake Resources Limited (ASX: SLR) well placed to produce fatter profit margins this year as their cost base is largely denominated in Australian dollars while sales are done in the greenback.
What's more, these miners have been working hard in cutting costs over the past year or so. Both miners have "all in sustaining costs" of around $A1,100 an ounce and this is expected to fall further in the coming quarters.
