Gold and gold miners have bounced sharply after the Fed announced it would not taper its bond-buying programme this quarter, but Nossek says this effect will soon dissipate.
Performance of gold and gold miners over 1 month
Source: FE Analytics
The analyst warns that the medium-term prospects are poor, with low valuations on gold producers a leading indicator for a falling metal price.
"This bounce will be short-lived," Nossek (pictured) said. "I think there will be more selling pressure than buying pressure and it will trend lower."
"Gold has rallied a number of times through 2012 and this year but it has always been short-lived and I think it’s unrealistic to think QE tapering will be postponed indefinitely; markets haven’t reflected that yet.""It’s also worth noting the volatility of gold: the implied volatility on gold is 10 per cent higher than that on equities, which is strange if you think of it as a safe haven asset which should have lower volatility."
Nossek acknowledges that the Fed was sensible to delay the start of tapering while there are still issues in the economy.
"The recovery remains fragile, especially because unemployment is falling as people are dropping out of the labour force rather than getting jobs, and this is one of the risks," he said.
"The Fed has decided it is still too early and there are overhanging macro risks that remain – threats to the US recovery include high oil prices thanks to the tensions in the Middle East."
"Slow growth means low employment growth so the Fed is trying to be cautious."
However, he says that investors could be surprised by how quickly this situation will turn around, with the US entering the time of the year when jobs are put on at a faster rate.
"Although it [the economy] is weak, I do not think it [the Fed] is going to postpone tapering QE indefinitely: it could even happen in December," he warned.
"We are in the hiring season now in September and October. Subdued unemployment growth in the summer is not too surprising."
He adds that the Fed has other reasons to want to get this policy underway, with its reputation crucial to market confidence.
"The Fed has signalled this for quite some time. For it not to do it would undermine its credibility, the last thing you want to do."
Many investors have been keen on gold miners in recent years due to the perception that large share-price falls make them undervalued.
Funds such as Baker Steel Gold and BlackRock Gold & General have suffered severe losses over the past three years while world markets have done well.
Performance of fund vs index over 3yrs
Source: FE Analytics
This has been attracting value hunters looking for a recovery situation, but Nossek says they should hold their fire.
The analyst warns the cycle in the industry still has some way to turn before the outlook for the miners improves.
"Gold miners are suffering a lot on the outlook," he said. "There will be a lot of over-supply. The big miners tend to overproduce in times of weakening gold prices, so they have higher operating costs and to compensate they over-produce, which will eventually squeeze out the weaker gold miners, which in turn squeezes supply and helps large miners to recover later in the cycle."
"The large miners trying to produce more than normal has hit them: the valuations of gold miners have contracted to the broader market, so there isn’t really much upward pressure and I think they will move back less than gold."
Nossek says that investors hoping for a rebound in the sector should wait until the smaller miners go out of business; this is likely to signal a reduction in supply and higher gold prices, raising the valuations of the bigger players.
"Once the smaller firms have been squeezed out, you might see supply correction and that will feed through into higher gold prices," he said.
Some analysts have argued that the poor performance of gold miners compared with the gold price suggests they have a great scope for re-rating, but Nossek says the opposite is the case: "Rather than saying the gold price reflects how the miners should be valued, I would say the valuations on miners say something about the price of gold going forward," he said.
"Because you don’t have an income stream from gold, you can take gold miner prices as a good proxy."
"As the valuations have contracted markedly, it suggests the outlook for the gold price is not as bullish as it was five to 10 years ago, so valuations on gold miners are a forward-looking indicator and have come down to levels of the broader market. There’s very limited outlook for an upsurge."
Data from FE Analytics shows that gold miners did foreshadow the large up-legs in the gold price over the last 10 years, lending credence to Nossek’s idea.
Performance of gold and gold miners over 10yrs
Source: FE Analytics
This suggests further pain on the horizon for anyone banking on gold to protect them.
"Valuations on gold miners are a good reflection of what the outlook is for gold itself," Nossek said.
However, the analyst says that the main reason to be bearish on the metal remains the improving US economy.
"All this will be overwhelmed by the macro drivers, which is mainly QE tapering," he said. "Every time employment numbers are strong, the gold price has struggled."
