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. Last Updated: 07/27/2016

Gold Stocks Jump on Record Prices

BloombergSpot prices for gold gained 4.6 percent for the week as the dollar tumbled.

After slumping in the first half, gold has taken the spotlight as one of the year’s best-performing safety investments, making a series of all-time highs last week and giving every indication that it was ready to move higher.

As investors sought refuge from a weakening dollar and looming inflation, spot prices for gold climbed to an all-time high close of 1055.1 per ounce Thursday, before backing off to 104.25 on Friday, up 4.6 percent for the week.

An anonymously sourced story Tuesday in London’s Independent newspaper — which said several major countries including Russia and Saudi Arabia were planning to price oil in currencies other than the dollar — whetted investors appetite for gold even further, and showed just how strong the precious metal had become.

Even after the rumor was immediately denied by several top officials of the countries named — including Deputy Finance Minister Dmitry Pankin — gold continued to go higher. And in a sign that the rumor mill had helped more than hurt Russia this week, Finance Minister Alexei Kudrin told reporters in Chisinau on Friday that he “hadn’t personally led any negotiations” on the topic, Interfax reported.

Thursday’s announcement from the Russian Gold Producers Union certainly did not diminish buyers’ appetites — Russia will likely produce 205 tons this year, 8 percent more than previously expected, the union said. The country produced 184.5 tons last year.

Analysts said speculative buying accounted for part of gold’s upward movement.

“At the beginning of the year, investor behavior was much more unanimous,” said Yevgeny Nadorshin, chief economist at Trust National Bank. “Now, different investors act in different ways. Some of them buy assets just because they are moving higher, and gold is no exception. Others buy gold to hedge against inflation.”

Nadorshin said he would stay away from gold now, as the macroeconomic outlook remains cloudy.

“Governments are not sure yet whether their measures to bring countries out of crisis will be effective. The market situation is still unclear,” he said.

Finam’s Alexander Osin was more optimistic.

“Russia’s Central Bank is buying gold as an investment hedge, and this lends strong support to the market. Investors are following suit and buying gold as well,” he said.

The upcoming financial reporting period in the United States is another factor in gold’s favor, Osin said.

“U.S. investors fear the results from many companies will not meet their expectations and prefer to invest in gold instead of equities,” he said.

While gold could experience a short-term correction, prices should rise by 20 percent to 30 percent next year, Osin said.

Gold stocks will lag gains from holding bullion over the long haul, but gold stocks could outpace the commodity over a shorter period, Nomura wrote in a research note.

The overall trend in the metal will remain positive, in part because rising personal incomes in China will contribute to increased demand for jewelry, Nomura said. China currently accounts for 12 percent of the world’s gold production, significantly less than its global consumption share of other metals.

The bank reiterated its buy recommendation on Polyus Gold, Russia’s largest producer of the metal, which plans a threefold output increase by 2015. Corporate governance issues related to a shareholder conflict between former partners Vladimir Potanin and Mikhail Prokhorov have been resolved following Potanin’s sale of his 37 percent stake earlier this year, the bank said.

London-traded shares of Polyus Gold were lifted by the gold price rally, closing up 11 percent on the week. Polyus gained 8.5 percent on the MICEX.

Other gold miners followed suit. Petropavlovsk, formerly Peter Hambro, closed up by 27 percent for the week in London. Russia’s third-largest gold producer said Tuesday that it had signed an agreement with Gazprom to create a $100 million fund to invest in gold mines throughout the country.

Polymetal, the country’s No. 2 producer, finished the week 15.3 percent higher in London after announcing a $70 million loan from UniCredit to refinance debt. The company also said Friday that it raised $89 million from the sale of shares to existing stockholders. Its MICEX-traded shares rose 8.2 percent on the week.

The gold rush came amid a broader surge for Russian equities, with both of Russia’s bourses hitting 52-week highs. The ruble-denominated MICEX Index finished the week up 11.25 percent, at 1308.14. The dollar-denominated RTS Index posted a weekly gain of 12.03 percent to close Friday at 1372.11.