- The US Dollar is likely to continue losing its global purchasing power
- Strong physical buying by Asian investors and central banks
- New holdings in Rio Alto
Despite the gold price recently dropping back to $1,300/oz, the fundamentals supporting high gold prices continue to look favourable. Washington may have delayed the debt ceiling crisis for now, but the problem is far from resolved. Expenditure needs to be cut to control the US budget deficit and the Fed seems unwilling to reduce the quantitative easing programmes as unemployment remains stubbornly high. Real interest rates remain in negative territory and inflation is creeping higher than economic growth. Therefore, the US Dollar is likely to continue losing its global purchasing power.
Many market participants expect gold to weaken further towards $1,000/oz. However, while such talk is very likely intended to help certain trading positions, they distract the generalist investor from the real facts. The facts show continued strong physical buying by Asian investors and central banks, who have a longer-term outlook and are seeking a safe-haven. The inevitable drop in future production as gold producers move their focus to their most profitable operations is also likely to contribute to higher prices in the near term. Geopolitical tensions seem to grow rather than recede, particularly in the Middle-East and North Africa, and gold should still have a prominent place in every portfolio as a diversifier and insurance against the unexpected.
Shares in some smaller gold producers can be risky in the current lower price environment. Careful stock picking is paramount to avoid those companies at risk of failure and those with uncertain cost structure.
Stock pick of the month:
We recently added Rio Alto (RIO.TO) to the portfolio. The company has just announced a record third quarter producing 59,157 ounces of gold from its La Arena mine in Peru. Most importantly, the growth in production means that operating costs are coming down. Rio Alto is now studying a second phase in its development that should ensure its growth in years to come.