South African precious metals manager Markus Bachmann thinks while market uncertainty remains, the gold price and gold stocks will remain supported. Meanwhile he expects a flurry of M&A in the coming months.

The gold price dipped last month as the dollar strengthened and investors became less risk-averse, but Bachmann thinks people could be moving too soon

‘After the crisis a lot of people went long physical commodities and precious metals and short financials,' he says. 'Then, with Bear Stearns getting bailed out, a lot of people thought 'OK, let's unwind that trade, the risks are identified and banks are a safe place to invest again'. And they could be very wrong.'

'They could get caught with their pants down, the impacts of the subprime crisis are not over yet and there can potentially still be some nasty surprises to expect,' he says. 'There are other time bombs out there that those geniuses were involved with - mortgage backed securities for example. So in a challenging period, this is far from being over. I wouldn’t subscribe to the unwinding of that trade. People will realise its not over until the fat lady sings, and until then gold will continue to attract investors.’

The subprime fall out is not the only reason he remains highly optimistic on gold, however. The fundamental laws of supply and demand as well as gold's natural role as an inflation hedge are also major factors contributing to his optimism.

Bachmann runs the Craton Capital Precious Metal Fund in Johannesburg, with which he has a bias to small and mid cap firms which he says have suffered in comparison to large caps in recent months. 

‘There are 10-12 really large global gold producers which attracted a lot of inflows and attention,' he says. 'To get really good performance in the gold space you could have got a monkey to throw darts at a list of large caps.’

While global risk aversion and a flight to quality in the wake of the subprime crisis was good for the gold price and for a number of large cap gold companies, small and mid caps in the space suffered unfairly Bachmann believes.