JOHANNESBURG (miningweekly.com) – Some gold-mining stocks currently have upside potential of 40% and more, says UBS Sub-Saharan Africa market head Marco Spichiger, who expects the gold price to trend back towards $2 000/oz and $2 200/oz levels within six months.

Spichiger, who is conducting a series of gold-investment workshops in South Africa together with UBS executives Nina Reinhart and Martin Bieri, tells Mining Weekly Online that the upside potential of some gold stocks is expected to be realised in the next 12 to 18 months.

“Yes, there will be more upside in smaller companies, but even some of the big companies that have done their homework are expected to recover well,” says Spichiger.

Heading the UBS gold-stock picks are Iamgold, Goldcorp and Newmont.

“These are the three shares in our universe that stand out as particularly interesting, but obviously investors would have to take into account their individual tolerance to risk before taking any decisions,” he adds.

Bieri expects mining stocks in general to attract far more investor interest from the start of 2012, with stock-picking continuing to be the order of the day until then.

On the gold price reviving to $2 200/oz, Spichiger concedes to Mining Weekly Online that there are many variables that have to be closely watched.

For example, the gold price would be hit again if Germany should decide to sell some of its gold to fund eurozone rescue packages.

“But, on the other hand, you have central banks in emerging markets like Brazil which have virtually no gold reserves, and which may be quite willing to build up reserves when the price is right,” Spichiger says.

Bieri says that the technical analysis points to the gold price dipping to $1 550/80/oz levels in early November, which will provide the opportunity for investors to get back into gold.

He adds that many investors bought when the gold price was at $1 200/oz to $1 600/oz, sold when gold reached $1 800/oz and $1 850/oz, and are waiting for the price to fall again so that they can get back into gold once again.

“If the technical analysis is correct, we will see good buying again at the beginning of November at the lower price levels,” he comments.

The world’s central banks, which hold under 20%, or about 30 000 t, of the 166 000 t of gold on surface, continue to be net buyers of gold and Reinhart sees no reason why there should be any significant change to the net-buying position of the central banks.

The only other reserves that these banks could accumulate are currencies and the world’s four major currencies of the British pound, the Japanese yen, the US dollar and the euro have become “the beauty contest of the ugly”, simply because not one of the currencies is attractive.

The eurozone crisis is discrediting the euro, the dollar is expected to depreciate, the uncertain political direction of coalition-led and stagflation-threatened Britain is weighing on the pound, and analysts continue to scratch their heads over the continued strength of the yen despite two decades of zero growth in Japan.

Against that background, the UBS team believe that gold has to hold the greater central-bank appeal.

Further, cyclical gold jewellery purchasing is traditional within the Indian wedding season.

“That’s why we believe that gold may bounce back in the short term. Medium term we're a bit more cautious, and longer term we still believe that gold has its value in a portfolio as an investment instrument,” Spichiger outlines to Mining Weekly Online.

As part of the investment workshop, UBS adapts genuine data in a virtual million-dollar investment simulation, fast-forwards and compares the outcome of the individually chosen investments against what actually took place historically.

The history spans bullish and bearish periods and times when the gold price has fallen but gold shares have shot up.

The workshops culminate with participants developing a virtual million-dollar gold portfolio based on current market conditions.

In a dry run done six weeks ago in Zurich, Spichiger chose to short physical gold and go long on gold shares, which paid off handsomely, until being hit by the last big stock-market drop.

He had expected the financial crisis to fade, stability to return and the stock markets to shoot up, which was why he bought the gold shares on the basis of diminishing gold supply – but he is still not better off.

“Even for me, as a banker, it was a learning outcome. You put your market view together in a structured process, but then the market surprises you, and it moves in a completely different way,” Spichiger confides to Mining Weekly Online.

The aim of the simulation exercise, being carried out in Asia, Europe, the Middle East and Africa, is to bring investors “as close as possible to the crystal ball” and to arrive at enlightened investment decision-making.

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