Gold shares under-perform despite the headlines

Gold’s recent record-breaking performance, surging to more than US$1,200/ounce in November, has seen it generate headlines and become a hot internet topic.
Gold shares have under-performed in the last month despite the headlines said RCR. But the junior companies (emerging explorers) have generally out-performed strongly in the last 12 months, with money flowing into the sector.
The catalyst for the November surge was the Indian central bank purchase of 200 tonnes of IMF gold, and the perception that central banks were deserting the US dollar and shifting their holdings into gold.
The surge was brought to an end by some good news for the US dollar which saw the greenback’s recent downtrend modestly reversed.
“Although central banks have been clumsy in the past when handling gold sales, we don’t expect them to behave like elephants in china shops if they want to buy gold,” said RCR senior gold analyst Dr Tony Parry, “and the limited liquidity of gold compared to US dollars will prevent them from using gold to significantly shift their foreign reserve holding away from US dollars.”
Dr Parry said that if the world’s central banks were to increase their gold holdings from the current level (10.3 per cent of reserves) by a further 10 per cent, to only 20.3 per cent of reserves, they would have to buy every ounce of global primary mine production of gold (at the current mine output rate) for the next ten years.
“And the US dollar would still rule,” said Dr Parry.
“The hype about gold becoming the new reserve currency is just that. And for that reason we are cautious on the medium term outlook for gold.”
The US dollar’s liquidity is its key to it continuing to be the world’s primary store of value, and is likely to find stability in the short-medium term, despite concerns over the US budget deficit and inflation, according to RCR.
Demand for gold-backed Exchange Traded Funds (ETFs) has been weak in the last two months, which suggests that fundamentals have not been driving gold’s volatility.
“We expect trading in the US$1,000/oz to US$1,100 oz band in the next six months, with more risk on the downside rather than the upside,” RCR reported.

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