For quite some time now gold analysts have been advising investors to invest in physical gold rather than gold companies as the costs of mining gold have negated much of the benefit of the rising gold price. However Kobus Nell, Resources Analyst at STANLIB argues that right now gold companies may be offering better value than gold itself, especially as they can generate income, something gold can never provide.

Nell says most of the gold companies are enjoying very good cash flow returns at current gold prices and should translate into much better earnings and dividends should these levels hold. It is dividends and earnings which are the main drivers of share prices. The current rand gold price (at the time writing this report) of $1 790/oz at R7.2/US$ is around 26% higher than the last quarter.

Some of the South African gold companies are trading between 50% – 60% of their theoretical net present values based on these spot prices which look attractive from a valuation perspective. Some global gold companies also mentioned that their dividend will be directly linked to the gold price, effectively getting a cash flow yield on your investment which you don’t get by investing into the physical gold.