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Gold to Rally Through 2012, S&P Says

BOSTON ( TheStreet) -- Standard & Poor's is recommending gold and gold miners as top investment picks only days after downgrading U.S. Treasuries, which sparked a firestorm in financial markets worldwide that boosted the price of the precious metal.

S&P's Equity Research Services unit made the recommendation Wednesday. It is independent of the firm's Ratings Services division, which lowered its long-term credit rating on the nation's debt to AA-plus from triple-A with a long-term negative outlook Friday.

Gold futures tumbled today after CME Group, owner of the world's biggest futures market, increased margins on gold contracts by 22%. Gold had soared 8% in the previous three days, bringing a one-year gain to 49%, on U.S. and European debt concerns and a slowdown in global economic growth. Safe-haven investments, such as gold, Treasuries and the Swiss Franc, have benefited the most.

"We believe that gold is in a bull market," writes S&P analyst Leo Larkin in a research note, because demand will outstrip supply "for the foreseeable future.

"Gold's price still has room to run despite its stellar advance and we believe that the precious metal could also continue to carry the prices of certain gold-related equities right along with it," he added.

That's because current global output remains stagnant while there is huge central-bank buying by emerging-market countries and a wide range of investors due to the current market turmoil.

S&P expects gold prices and earnings for gold producers to continue rising through 2012, because the metal is seen as a safe-haven alternative to other assets in uncertain times.

"Weak economic data, possible sovereign-debt defaults and general financial market instability" have all contributed to acceleration in buying by investors, it said.

For mutual fund investors seeking to invest in gold producers, S&P recommends: Oppenheimer Gold & Specialized Minerals Fund (OPGSX), Van Eck International Investors Gold Fund (INIVX) and Tocqueville Gold Fund (TGLDX).

It targets three gold-industry stocks that it says are poised to outperform the market over the next 12 months: Barrick Gold (ABX - Get Report), Newmont Mining (NEM - Get Report) and Randgold Resources (GOLD - Get Report).

In his argument in support of gold-producer stocks, Larkin said: They "have not been following the metal's meteoric rise. The reasons for the disparity are three-fold: share dilution, rising expenses and new ways to play gold."

"But the wide disparity between the precious metal and the companies that produce it is about to narrow for two reasons," he said. First, because gold companies are now generating enough free cash flow to fund internal expansion and external growth via acquisitions without having to resort to dilutive financing." And, second, because "gold is now rising faster than mining-input costs so there will be greater earnings per share leverage to the higher gold price."
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