underperformance of gold shares

WHY?

A few simple reasons:

Many small gold mining companies have had big dreams about resurrecting the fortunes of closed or ailing gold mines. Croessus mining (now gone to gold mining heaven) was one of the first casualties on this front.

Now, Monarch Gold (which tried to revive the Davyhurst mine that it picked up from Croessus) has run into big problems.

Bendigo Mining has had ambitions with its Kangaroo Flat underground mine but cost overrruns and low grade ore have caused problems.

Remember View Resources? It came to grief after buying the Bronzewing mining operation from Newmont for $9 million ... but failed dismally to reach production targets.

One could go on ...

Small mining companies with high production costs (and they could be propelled even higher with the ever increasing spiral of energy prices)could easily run into "survival problems".

Avoid like the plague gold mining companies that are hedged producers. That's what undid the ill-fated Sons Of Gwalia (at the time Australia's second largest gold producer).

Stick to low cost producers - the bigger the better - which have large resources / reserves. These will be the survivors and will be the ones to ultimately benefit from a much higher inflation driven gold price.

Even top line producers like NCM and LGL will have to deal with increasing costs.

So what will it take to get the golden behmoths up and running?

Simple: PRICE INCREASES IN THE GOLD PRICE WHICH WELL AND TRULY OUTSTRIP COST INCREASES.

Interestingly, Schroder Investment Management has just come out with and inflation driven gold price of $5000 (USD) an ounce.

This from today's "Australian":

"..... Schroder is no two bit player having $US260 billion under management. Christopher Wyke, who runs the firm's commodities desk in London,says investors will turn increasingly to gold as inflation rates around the world soar to 10 percent or more. He is also predicting that central banks will become net buyers of the metal.

You could easily see for several years that prices rise not to $US1000 an ounce but prices rise to $US5000 an ounce or more."

So stick with VIABLE low cost producers or buy the physical metal.

Gold will have it's "day in the sun" - and the quality gold stocks will assuredly take off.