Soaring Gold Makes Mining Stocks a Risk

Gold prices rocketed to a 28-year high last week as Severstal tightened the screws in its battle for gold miner Celtic Resources.

On Friday, Severstal upped its bid for Celtic, prompting feverish activity on the London-listed company's stock. The steel firm's march on Celtic comes amid a week of bullish forecasts on the gold front.

Goldman Sachs raised its six-month forecast on gold to $800 per ounce earlier in the week, as the plunging dollar sent investors into gold as the next best thing.

"Here you have a choice between a paper currency that's depreciating and a tangible asset," said Erik DePoy, strategist at Alfa Bank. "The question is how much resistance we will see on the part of central banks.

"There is the view that central banks have been managing the gold price," DePoy said. "They sell their reserves to keep prices down [and to] dampen inflationary expectations. They are playing a psychological game."

On Friday, gold was trading up at about $739 per ounce.

But it wasn't making a lot of difference to Russian gold stocks. Polyus Gold has been one of the poorest performers among the gold plays. Michael Kavanagh, a metals analyst at UralSib, said the gold price had little bearing on the company's stock price, given that most of its growth is long-term. It is not expected to show an increase in production until 2009 or 2010.