Gold Shares Versus Gold Prices

The gold equity sell-off probably represents a nadir in investor sentiment, typical of major bottoms.

Gold Shares Versus Gold Prices

G old equities are trading back near 2007 levels, despite a twofold increase in the price of gold. The underperformance of gold equities vis-à-vis the price of gold can be mostly explained by ETF flows.

Gold stocks have been cannibalized by the surge in ETF volumes, with P/E multiples moving inversely with ETF flows. Part of the reason is that during times of extreme risk aversion and safe haven demand, investors prefer physical gold.

If we are right that 2013H1 will be dominated by easing “tail risk”, then a gold share rerating (vis-à-vis the gold price) is likely. But even if “tail risk” stays elevated in 2013H1, there are reasons to believe the underperformance of gold shares vis-à-vis the bullion price is overdone.

Investor disappointment over the past three years has left gold equities cheap, unloved and under owned. The final catalyst for gold shares may well be intense investor pressure to contain cost overruns and focus on efficiency. Six gold mining CEOs lost their jobs in 2012.

Such shakeups usually herald a major shift in corporate strategy, and gold equities could do well, even if gold prices go nowhere. (tweet this!)

Bottom Line: Remain tactically long gold shares/short gold and strategically long gold equities.

Implications Of Conflicting Forces Affecting The U.S. Dollar

Macro Research | BCA | Independent Economic ResearchPlease find another edition of Q&A with BCA – and thanks to BCA Chief Economist, Martin Barnes, for taking the time to answer this question.

Q. There are two prominent factors that determine foreign currency behavior and would appear to be in conflict:

  1. Gradually improving structural economic trends within the USA that are related to the revolution in domestic manufacturing and oil and gas production. These forces would: (a) Reduce current account deficits; and (b) Boost capital flows because of the growing attraction of the USA as an investment destination. USD Appreciation
  2. The alternative view relates to “risk-on” and “risk-off” strategies: Broad strengthening of the US economy should boost growth in the global economy. As global economic conditions improve/global risks subside, the risk-on trade would boost the euro (and other currencies) versus the dollar.

Which of these two conflicting forces would be dominant with respect to the USD?

A.  The dollar outlook is quite tricky because, as you noted, various cross currents will be at work. I would not attach that much emphasis on the so-called manufacturing renaissance or the shale gas and oil boom. Yes, the energy component of the deficit will drop further, but the trade balance remains very sensitive to the overall growth rate because imports are tightly correlated with domestic demand.

The other factor you did not mention was monetary policy, and we generally assume that the Fed will remain more pro-active than the ECB when it comes to promoting growth. So that should be dollar bearish.

Finally, I worry that at some point, markets will do to the US what they are doing to Europe and that would also be dollar bearish. This was covered in a report on the dollar that my colleague Peter Berezin recent published in The Bank Credit Analyst.

I agree with him that the dollar is more likely to be a weak than strong currency in the coming years. (tweet this!)