As gold cools, its miners are the next hotspot

By Dominic Lau - Analysis

LONDON (Reuters) - The price of gold might again be testing record highs, driven by investors seeking shelter from the financial blizzard, but shares in companies mining the precious metal now look a better bet.

With financial markets tumbling and currencies crumbling, investors have fled to gold as a traditional safe haven in times of trouble, and as a bulwark against the long-term inflationary effects of massive and various government stimulus packages and monetary easing by central banks.

However, there may not be much upside left in the yellow metal, as the appetite for jewelry, which accounted for nearly 60 percent of global gold demand last year, falls in step with the slowing global economy.

Shares in gold miners, however, have not kept up with the metal's prices and should do well, despite the volatile stock markets, for investors with a high risk tolerance.

"You're likely to have better performance in the equity, because it has lagged, and there is not much catalyst for the upside in the gold price itself," said Bradley George, fund manager and head of global equity resources at Investec.

George said he expected gold to trade within a range of $930 to $1,050 an ounce, with the upper end capped by weaker jewelry demand and the downside supported by safety-first investors looking to preserve cash.

Spot gold, which traded at $939.85 an ounce on Thursday, has risen 40.6 percent in the last 18 months as the financial crisis has developed, including a 7 percent rise so far this year.

By contrast, the gold and silver index .XAU, which comprises major U.S. and Canadian gold mining stocks, has fallen 13.5 percent in that period, including a fall of 4.7 percent this year, and despite a surge of 83 percent over the last four months.