Steve Land
Vice President
Portfolio Manager and Research Analyst
Franklin Global Advisers

Several factors have attributed to the recent rapid movements of gold prices over a short period of time. On a macro level, lingering uncertainties in financial markets can stoke interest in hard assets such as gold. Investors concerned with inflation resulting from monetary stimulus policies worldwide may also be looking to gold to counter any future negative impact. On a more immediate level, plans by gold producers to eliminate hedge books may become a positive catalyst for gold, as companies must buy back actual gold to deliver into hedges they want to close out. Additionally, a reduction in annual gold sales targets by central banks, along with the possibility of China increasing its gold reserves, which would in turn absorb any major divestment from gold, all potentially bode well for gold prices.

While gold prices are impossible to forecast, we believe there are compelling reasons for investing in gold at the moment. Gold can indeed help hedge against inflation, which appears to be a real possibility in light of loose monetary policies around the world. In regard to central banks selling gold, as their sales targets have decreased, their interest in actual gold sales has also waned. Central banks and China could actual increase gold holdings in the future. Adding to that mix is the near-term prospect of gold producers de-hedging, which creates ongoing support for gold prices in our view.

With regard to other precious metals, the fundamentals for platinum and palladium differ from those for gold. Platinum and palladium are also hard assets that can appeal to investors who want to diversify their portfolios, but a significant portion of global demand for these two metals comes from carmakers. As the auto industry has suffered over the last 12 months, demand for platinum and palladium has also taken a hit. Demand for these metals is likely to improve once the auto industry recovers. However, both metals are showing a surplus in supply that could put downward pressure on their prices.

Elsewhere, we believe stocks of mining companies represent attractive investment opportunities, despite their year-to-date run-up from March lows. Declines in operating costs have as much of an impact on mining company bottom lines as gold prices. Mining companies with large capitalizations that also deliver organic growth from either acquisitions made early in the business cycle or discoveries can potentially generate shareholder value.

Merger and acquisition prospects can potentially further boost values of mining stocks. As gold reserves become more difficult to replace, larger mining companies could move to acquire smaller development companies. Holding such smaller companies may pose more risk than owning more established mining giants, but developing mines at smaller firms may be of significant interest to larger would-be suitors.

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