Tocqueville: Outlook For Gold Price & Gold Shares

The second quarter closed out on a strong note for gold bullion and the mining shares. Reuters reported two weeks ago that the gold price saw its biggest quarterly gain of the last two years.

So far mainstream media. More in-depth insights were published this week in the quarterly investor letter from Tocqueville Asset Management. The letter (bottom of this article) is edited by the respected John Hathaway and contains an overview of the past quarter as far as gold bullion and precious metals mining shares are concerned, as well as the firm’s short and long term expectations. It contains also 60 charts that Tocqueville is monitoring to come to their conclusions. This is the high level summary of Q3:

Gold and precious metals stocks rallied sharply in the third quarter. The rally suggests that the lengthy correction which began in August of 2011 has been completed, setting the stage for a powerful new leg in the bull market for precious metals and related mining shares. During the quarter, the metal rose 10.9% to $1,772/oz. while the XAU index rose 21.7% to 191. Since mid-May, precious metals shares as measured by the XAU have outperformed gold bullion, with the XAU index rising 35.9% against a 14.8% advance for the metal. Outperformance by the shares over the metal has historically coincided with the strongest advances in both absolute and relative terms for the precious metals complex.

What’s probably more interesting for investors and owners of gold bullion or shares, is what the expectations of the firm are. An overview from the letter:

  • Expectations of gold bullion: Tocqueville expects to see new highs the $US gold spot price in the next twelve months (euro gold is already at record highs).
  • Fundamental drivers of the gold price: Negative real rates are key and the source of dissatisfaction, resulting to drive capital away in search for alternatives.
  • Expectations of gold shares: Precious metals stocks will rally strongly once the metal breaks through the previous peak of around $1,920 and stays above that level. That kind of environment will create a more favorable perception towards gold and the ongoing bull market, which should translate in “outsized relative performance for the mining shares”.

Undoubtedly there was a positive outlook for the gold and silver mining shares, which are still considered undervalued:

The shares remain historically cheap. Profit margins are at record highs and returns on capital are approaching respectable levels. Equity capital issuance has dropped sharply in the last few years, a reflection of the industry’s much improved profitability. The sell side consensus assumes forward gold price is $1,313/oz., a discount of 26% to current spot.

We want to draw your attention to the wealth of statistics that are included in the letter, in particular in the form of 60 different charts. The ones we liked most (if you don’t have time to go through all of them):

  • figure 20: the debt super cycle visualized
  • figure 25: China net purchases of long term US securities (historically low)
  • figure 35: emerging Asia’s share of gold demand historically high
  • figure 39: Gold sentiment index rebound
  • figure 44: commercial net shorts exploded over the past weeks
  • figure 47: gold stock valuations historically low
  • figure 52 till 56: a view on the gold mining productiveness

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