(By Mani) Gold is traditionally thought of as a defense mechanism for weak economic conditions, as well as uncertainty associated with alternative investments.
Meanwhile, a corollary for gold could be retail defensive plays such as the discount store chain Dollarama, Inc. (TSX: DOL) in Canada and Family Dollar (NYSE: FDO) in the U.S.
Gold and these retailers all participated in the rise in global uncertainty for the period of third quarter of 2009 to the third quarter of 2011 before breaking apart.
"In the past year, gold has remained relatively flat, whereas Dollarama has doubled in value. We think that the drive to increasing business in discount stores could be matched by rising gold prices, which also represent the climbing of a wall of worry," CIBC Equities analyst Barry Cooper wrote in a note to clients.
While this relationship was true for the first two years after the Dollarama IPO, the relationship has since broken down from an R square of 91 percent to 28 percent, suggesting that gold as a safe haven is not participating to the same degree as retail investors.
"We suspect that gold is likely to move higher in conjunction with ever-increasing concerns over the economy for the same reasons that discount stores have attracted customers," Cooper said.
For 2013, Cooper sees gold to touch 2,000 an ounce and 2,200 an ounce in 2014. The most leveraged name to gold price movements in 2014 in terms of cash flow per share is Golden Star Resources Ltd. (AMEX: GSS), followed by Richmont Mines, Inc. (AMEX: RIC) and Claude Resources (AMEX: CRJ). The least leveraged names include Pan African Resources (LSE: PAF), Franco Nevada (NYSE:FNV) (TSX: FNV), and Harmony Gold Mining (NYSE: HAR).
However, for much of the bull run in gold over the past 10 years, owning leveraged names has not proved to be all that successful as part of an investment strategy.
"In part, leverage comes from the quality of the underlying asset itself, and problems can therefore occur whereby an investment offers good financial leverage, but comes at the price of high operating leverage efficiency. It is this latter effect that tends to counter the benefits of leverage offered by gold producers when costs can be rising faster than the product that is produced," Cooper noted.
Meanwhile, November and December represent the first and third strongest months, respectively, for bullion performance, with seasonality being driven off of restocking of jewelry as Christmas purchases take place and rethinking of the role of gold following traditionally weak markets in the month of October. There would be higher Indian demand, driven by festive seasons such as Diwali.
"We are entering into the strongest period of the year for both silver and gold. In the past decade, investors have typically been able to capture 56% of the yearly gains for gold and 66% of the yearly gains for silver by holding the metals over the four-month period November to February," Cooper said.