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The gold price surged to a high of $1,900 per ounce in September 2011 but has since traded relatively flat at between $1,600 per ounce and $1,700 per ounce. Yet, despite this tepid recent performance, a number of factors provide structural support for the gold price over the near future. First, quantitative easing (QE, in other words asset purchases to increase the level of money in the economy) remains a favoured policy of many central banks, for example in the UK and US, to try to stimulate economic growth. However, policies such as QE are likely to stoke inflation and devalue major currencies, in particular the US dollar, which will increase the attraction of alternate stores of value such as gold. Second, ongoing concerns about eurozone debt defaults have driven many investors to seek out 'safe haven' assets such as gold. With no near-term end in sight to the crisis, developments in Europe are likely to strengthen demand for gold. Third, central banks in developing economies have been buying large quantities of gold, to reduce their exposure to the "G3" currencies of the US dollar, euro and Japanese yen. World Gold Council statistics show that whereas the US, Germany, Italy and France all hold over 70 per cent of their central bank reserves in the form of gold, China holds just 1.6 per cent of its central bank reserves in gold. The Chinese central bank can therefore be expected to increase, potentially substantially, its gold buying in future. Yet, despite such fundamentals that are likely to underpin a strong gold price for some years to come, gold mining shares have been sold off heavily over the past year. Why? Specialist natural resources broker RFC Ambrian explains that it is not just gold mining shares that have been sold off over the past year. The eurozone crisis has driven investors to shun risk assets such as equities altogether in favour of safe-haven assets such as US, UK and German government bonds. In fact, such has been the demand for high-quality government bonds that their yields (which move inversely with prices) have been driven to record lows and in some cases negative in real terms. However, the Ambrian analysts point to sector-specific factors that have caused gold mining shares to underperform. Sharp rises in power and labour costs - a mining industry-wide phenomenon - have eroded margins and caused miners to perform poorly financially. Furthermore, the high gold price has encouraged companies to mine projects which are marginal, with inevitably higher instances of operational underperformance or in some cases outright failure. Finally, the emergence of exchange-traded funds (ETFs) has provided investors with an alternative to gold mining shares, which have historically been the only way for investors to gain exposure to gold without owning physical gold. The Ambrian analysts believe that overall equity markets may face some difficult times ahead, at least until the eurozone crisis is resolved or there is some light at the end of the gloomy economic tunnel. However, they also see an excellent opportunity to acquire gold shares since, as in 2008 during the global financial crisis, there is a "significant disconnect between the gold price and gold equities". In 2008, the disconnect between gold shares and gold spot prices didn't last long before gold shares caught back up with the gold price. The prolonged disconnect this time is due to the eurozone crisis dragging on for considerably longer than the global financial crisis, according to the analysts. Nevertheless, Ambrian's analysts now believe there is an excellent arbitrage opportunity between undervalued gold equities and the current spot price. "For the longer term," they conclude, "gold prices and thus gold equities look set to continue rising." You may never get another chance to make such gains from investing in oil and gas and mining shares. Click the link below to discover how you can start receiving investment alerts that have made our readers average returns of 81% over a two-year period. http://resources-investment.com/
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