In Search of Gold: Are Small-Cap Gold Companies Set For Another Run? (Lee)

In Search of Gold
Are Small-Cap Gold Companies Set For Another Run?

Alfred Lee, CFA, DMS
Vice President & Investment Strategist
BMO ETFs & Global Structured Investments
BMO Asset Management

March 14, 2011

Recent Developments:
  • For our readers that may recall, our favoured area in 2010 was gold and particularly small-cap gold related companies. Coming into the new-year, we held back on gold recommendations since bullion prices fell to its 50-day moving average (MA). In mid-January, the price of gold eventually crossed below its 50-day MA before trending back up in early February when its MACD also crossed over its signal line.
  • On February 25, we recommended paring back exposure in our BMO Junior Gas Index ETF (ZJN) in favour of our BMO Junior Gold Index ETF (ZJG) recognizing the divergence between natural gas spot prices and gas related equities. In addition, as bullion prices were trending positive, we saw a better risk/return profile for gold related investments.
  • Recently, gold equities have also been gaining strength in relation to base metal equities as referenced in Chart A below. The relative strength (RS) of gold bullion to copper prices also recently crossed above its 50-day MA (Chart B).
  • From a macro perspective, we view gold as slowly making a transition from a hedge against a global currency war to one against inflationary pressures, a large focus of emerging countries. Rather than devalue their currencies many of these emerging nations will now be forced to let their currencies appreciate, given recent concerns of food price inflation. Additionally, with the recent rise in market uncertainties, gold will likely be viewed as a safe-haven.

Potential Investment Opportunity:

  • As base metal prices tend to be a leading economic indicator as is the equity market, the price of industrial metals are highly correlated to equity market sentiment. Therefore, in terms of overall portfolio construction, we view precious metals as a larger contributor to overall portfolio efficiency as it offers a lower correlation to equity prices. The market's recognition of gold and other precious metals as a multi-purpose hedge is a large driver in its non-correlation to other asset classes. For portfolio diversification, investors may want to consider non-equity based precious metal ETFs and exchange-traded products (ETPs) such as the BMO Precious Metals Commodity Index ETF (ZCP).
  • Investors looking for trades that are oriented towards generating portfolio alpha, may want to consider the BMO Junior Gold Index ETF (ZJG). The recent strength of small-cap gold companies relative to their larger-cap peers has been positive, particularly if the relative strength (RS) between the two groups finds support above its 50-day MA and its MACD cross over. (Chart C)

Chart A: Gold Equities Gaining Strength vs. Base Metal Equities

Gold Equities Gaining Strength vs. Base Metal Equities
Source:, BMO Asset Management Inc.

Chart B: Gold Looking For Support Against Copper Prices

Gold Looking For Support Against Copper Prices
Source:, BMO Asset Management Inc.

Chart C: Small-Cap Gold Looking To Break Out Relative To Large-Caps

Small-Cap Gold Looking To Break Out Relative To Large-Caps
Source: StockCharts, BMO Asset Management Inc.

*All prices as of market close March 14, 2011 unless otherwise indicated.

Information, opinions and statistical data contained in this report were obtained or derived from sources deemed to be reliable, but BMO Asset Management Inc. does not represent that any such information, opinion or statistical data is accurate or complete and they should not be relied upon as such. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment.

BMO ETFs are managed by BMO Asset Management Inc, an investment counsel firm and separate legal entity from the Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange-traded funds. Please read the prospectus before investing. The funds are not guaranteed, their value changes frequently and past performance may not be repeated.

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