(By Mani) Early in 2013, gold equities again find themselves in a challenging place with valuations trending back to the historical lows established last August. No longer buoyed by a sustained rise in gold prices, increased emphasis is being placed directly on gold companies to find ways to reignite investor interest in the sector.
The first step in finding a solution to any problem is to recognize that one exists, and several management teams altering strategies in an attempt to improve their investment appeal.
"In 2013, we expect more efforts will be made by gold companies to improve communication and attempt to regain investor interest," CIBC analyst Alec Kodatsky wrote in a note to clients.
Consequently, gold companies would be issuing conservative guidance and focus on demonstrating capital discipline.
Meanwhile, gold prices posted a disappointing performance in the fourth quarter with the euphoria of QE3 quickly waning and the typical year-end seasonal strength in bullion also failing to materialize.
Strength in the U.S. dollar post-QE3 emerged as a culprit for the stall in gold prices, although an element of "selling the QE3 news" and a broader market rotation towards riskier assets also appeared to be taking place as the global economic picture seemed to brighten.
Recently two further headwinds for gold have emerged with the quasi-resolution of the U.S. "fiscal cliff" and the release of the December Fed minutes that indicated an emerging sentiment from some members that QE3 could be curtailed or even stopped by the end of 2013.
"These announcements seem likely to temporarily lessen the near-term appetite for "safe haven" assets, making it difficult for gold to gain traction as we approach what is typically a weaker seasonal period for precious metal prices," Kodatsky wrote.
Notably, the upcoming February deadline for raising the U.S. debt ceiling and a decision on the potential inclusion of gold bullion as a Tier I asset under Basel III as potential near-term catalysts for gold prices.
In addition, the fundamental drivers for gold remain constructive as the fiscal imbalances across major economies remain unresolved and with investor and Central Bank appetite remaining healthy.
"As was the case with its predecessor programs, we continue to expect QE3 to have a positive influence on gold prices in the order of $20-$30 per month," Kodatsky said.
Although bullion starts the year from a weaker position than previously anticipated, analysts continue to hold an optimistic pricing outlook for 2013 and beyond.
"We are lowering our forecast gold price for 2013 to $1,800/oz. (from $2,000/oz.) and for 2014 to $2,000/oz. (from $2,200/oz.). Our long-term price forecast of $1,500/oz. has been maintained and we believe remains well supported by current industry cost levels," Kodatsky added.