Bearish for Two Reasons - We are bearish on gold and silver shares for two reasons. Firstly, we are bearish on the metals. Secondly, we note that equity valuations contracted sharply after the last big mega market in the seventies and we do not think that valuations have completed enough of that post-peak phase yet in the current bear market.

Gold Remains in a Bear Market - We believe that gold peaked in 2011 and that it is still in a bear market. Only the occasional rally will provide some optimism and we believe that the recent bear-market rally is drawing to a close. In February 2013 we downgraded two UK gold/silver shares to Sell, in March we downgraded another to Sell and in April another 3 such that all of our UK-covered gold-silver stocks were Sell-Rated at that time. In early July we upgraded 3 of the better quality names to Neutral on the assumption that gold could have a meaningful rally within an ongoing bear market. We are downgrading gold shares once more.

Valuations Cheaper than 2011/12 but Expensive vs. Longer History - We show in this document how that gold equity valuations contracted sharply after the previous mega bull market in the seventies. We compare that to events in the early stages of the current bull market and conclude that valuations have not yet contracted enough.

High - All-In - Costs - We estimate that ~98% of the global gold industry (based on production on our cost curve) is currently cash-burning on an ‘all-in’ cost basis. This is mainly as the gold producers are failing to cut capex, exploration and corporate costs quickly enough to keep up with a 12% fall in the gold price.

Reducing our Valuations - For reasons explained in this document, we have reduced the P/NPV ratio which we use to set our target price on Fresnillo, Randgold and Polyus from 1.4x P/NPV to 1.25x P/NPV. The outcome is that we now downgrade Polyus from Buy to Neutral and we downgrade Fresnillo and Randgold from Neutral to Sell. All that we have done is to review the premium between the better quality golds and the poorer quality golds (where we use 1.1x P/NPV) and have decided to close the gap based on what is on offer from competing miners. (Citi)

Eoin Treacy's view In currencies the challenge is always to trade the strongest against the weakest. Over the last decade gold has become remonetised in the eyes of investors and as a result has become increasingly sensitive to the perceptions of value in the currency markets. The recent weakness of the US Dollar stemming from continued anxiety on the government shutdown and approaching deadline on new borrowing has seen a range of currencies rally against it.

Gold has at least steadied and appears to be building support above the July lows. A break in the six-week progression of lower rally highs, currently near $1350 would confirm a return to demand dominance.

Where gold differs from other currencies is in the ability to increase supply. Gold miners have been faced with declining ore grades, higher energy, environmental and labour costs as well as acquisitive governments. The net effect is that the cost of production has surged and the only way to bring costs under control will be to cut back on exploration and capital exploration. This type of situation should benefit more established miners who can hedge production.

As we look at the performance of gold shares, whereas once there was a high degree of commonality, they are now trading on their individual merits. For example while the vast majority of Gold BUGS constituents have returned to test their lows for the year, Franco Nevada which is a gold and energy royalty trust continues to hold its progression of higher reaction lows. Sibanye Gold which represents some of Gold Field’s more mature South African assets remains in a consistent uptrend and paid its first dividend in the last month.