However, it is interesting to see what the actual recent trends are in the gold market.  While the holdings of the ETF (exchange traded fund) for gold suffered massive redemptions this year (almost 900 tons so far in 2013), the demand for physical gold rose dramatically (up 600 tons) with most of the buying coming from China.  The net impact for the year as calculated by the World Gold Council, has been a decline in demand of 382 tonnes, thereby explaining much of the fall in the gold price.  However, the gold ETF is not in unlimited supply (currently about 1900 tons) and the selling has moderated throughout the year (from over 400 tons in the 2nd quarter to 120 tons in the 3rd quarter of 2013).  So will the Chinese buying continue and lead to net buying of gold again?

Asian Gold Imports

Between now and year end it seems more likely that investors will continue to scale out of gold stocks and the underlying gold ETF, taking investment losses.  However, we do think that the downward pressure on paper currencies such as the U.S. dollar will resume as they start to deal with their overwhelming sovereign debt.  All the money being printed over the past few years could actually start to show up in higher inflation numbers.   The gold companies are dealing with average mining costs in the US$1100 range, so the recent fall in the gold price is pushing them to the position where they will have to start shutting down mines or deferring expansion, particularly on the higher cost properties.  Better financial and operational discipline by the miners and some stabilization in the price of gold could lead to a sharp rebound in the gold stocks, particularly if we see a pullback in the overall stock market.  While this has been a good sector for investors to avoid, we don’t see it as being a higher risk area of the stock market anymore.  While not advocating an overweight position in gold stocks, we don’t think a zero weight makes sense either.  We are adding selectively to the companies which are controlling costs, expanding production and trading at discounted valuations.  Semafo Inc., Osisko Mining, B2Gold and Yamana Gold all look like exceptional value with good growth potential at current prices.

Current Investment Strategy:  We continue to see attractive long-term buying opportunities in the growth stocks even though investors remain wary about global growth.  The U.S. economy is clearly recovering, Europe has seen its lows, Japan has restructured for growth and the emerging economies still have longer-term growth at superior rates.  All of this should support earnings growth for globally-oriented companies.  Stock valuations overall are still attractive versus bonds but are no longer undervalued relative to long-term averages.  Future stock gains will be driven primarily by earnings growth.  Although interest rates are starting to rise, they are expected to remain relatively low, which should still support higher stock valuations.  However, market dynamics are a bit ‘stretched’ in the short-term since the stock market has not seen a correction of any magnitude in almost two years.  However, despite these short-term risks, we remain slightly overweight stocks with an emphasis on global growth stocks.

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