NEW YORK (CNN/Money) -
Gold prices soared to highs not seen in more than seven years last week, giving gold stocks something to cheer about, too. Industry analysts say there's still room for the sector to shine.
Gold stocks have skyrocketed this year, with the Philadelphia Gold and Silver Index jumping nearly 19 percent since the start of 2003, as a result of the rise in the metal's price. COMEX gold closed around $386 an ounce Tuesday, having risen about $40 an ounce, or 11.6 percent, in about three months.
Investors traditionally flock to gold as a hedge against economic uncertainty. Concerns over the weakening dollar and recent threats to the pace of economic recovery in the United States, including higher oil prices and continued job losses, have been pushing gold prices higher.
Gold stocks have benefited from the spike in bullion. As of Tuesday's close, shares of Freeport McMoRan (FCX: Research, Estimates) had jumped more than 97 percent so far this year, while Ghana's Ashanti Goldfields (ASL: Research, Estimates) had added more than 78 percent. Newmont Mining (NEM: Research, Estimates), the only large-cap gold miner, had jumped nearly 35 percent. Small-cap Northgate Exploration (NXG: Research, Estimates) had added more than 47 percent.
Industry analysts said despite the run-ups, because the reasons for the spike are unlikely to go away any time soon, an upside still exists for gold and gold stocks.
"I think gold is going to go up even further from here," said Michael Fowler, gold analyst at Desjardins Securities. "Gold stocks could go up another 30-to-40 percent."
And while stock prices are running high, the valuations of many gold stocks remain justified, analysts say. Many price/earnings ratios are holding around 20-to-40 times forward earnings, which is in the range of the past few years. Only a few, like Glammis Gold (GLG: Research, Estimates) and Barrick Gold, claim P/Es as high as 70.
Weak currencies mean stronger gold
Among the factors that are likely to keep gold shining is the current environment of competitive devaluation as countries battle to keep their currencies weak in order to increase demand for exports.
The dollar hit a fresh three-year low against the Japanese yen Tuesday, as the effects lingered from a meeting of the Group of Seven (G7) industrialized nations in the previous week. The G7 called for more exchange rate flexibility as a means to help iron out global economic imbalances. But many in the market speculate that Japan and other Asian countries are intervening, or buying up dollars to keep the value of their own currencies low. In this case, the paper money would lose value against other commodities, like gold.
"All the currencies end up staying on par, so you won't see inflation in one country, but you'll see gold rising," said Tom Winmill, president of Midas Fund.
Lately the deteriorating U.S. fiscal situation also has buoyed gold. The Treasury Department reported that the U.S. deficit rose in August to $400.5 billion so far for fiscal 2003, only one month before the close of the fiscal year. The growing deficit has also put the U.S. dollar under pressure and driven investors to gold.
The positive environment for gold -- and gold stocks -- is likely to hold on well into next year, according to Wall Streeters, many of whom say gold will crack $400 an ounce, and maybe even $425, by the year's end.
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