Precious Metals

In 2010,the gold price surged 29% to finish the year srong at $1420 per ounce, not far off its all time high. There is an increased recognition by the global investment community of the importance of gold as an alternative currency as well as a good hedge against rising inflationary pressures. The acceptance of gold as a financial asset has been growing quite steadily over the last decade, however it is only post the global financial crisis that it has attracted such mainstream attention.

Central banks were reliable sellers of gold but this have changed in the past two years. In 2009 and 2010, central bank reserves of gold increased by 631 tonnes. Emerging markets in the likes of China and India,have looked to diversify their rapidly growing foreign exchange reserves away from the US dollar. European central banks have stopped selling, following 30 years of reducing their gold holdings. This has an implication on the liquidity of the physical gold market hence boosting its underlying price.

The challenges ahead for the sector are political instability and government bureaucracy which can halt the rate of industry growth despite record gold prices. M&A activities are evident in the industry where players are looking to obtain new assets with excess cashflow.

The attractiveness of acquiring companies with under-developed ore bodies have increased. On the other hand, when looking at gold equities, the potential of buybacks, splits and dividends as a result of excess cash is very very attractive.

Looking to 2011, with high profit margins, increasing dividends and the potential for further M&A activity, I believe the gold miners-paricularly those that can deliver growth in a challenging environment-should have a good year ahead.

However, point to note-as compared to there metals like iron, copper and aluminium, the rise in gold prices does reflect increasing demand (although the real use of the commodity are much more restricted than the rest of the commodity family). I can't think that the usage of gold can be more than just for ornamental purposes and also for electrical wiring.Therefore,the high demand may be speculative in nature.