Investment interest has moderated as global economies exit ultra-expansionary monetary policies. We expect gold to remain caught between near-term USD strength, deflation concern and longer-term inflation risk. Gold's resilience to global rate hike announcements indicates support and stabilization. We think gold is pricing in a gradual tightening this year.

We believe gold shares are attractively priced to play longer-term inflation/USD weakness theme. The main investment case for gold equities is a levered play on gold prices. Cost rises eroded ~half of gold price gains between 1997 and 2008. Recent quarterly results suggest miners are now delivering - costs are in control and progress generally continues on development projects. We expect this to continue, and believe our coverage is well-positioned to play longer-term inflation/USD weakness.

Gold shares strongly lag valuations achieved when gold first pushed through $1,000 per ounce. At that time, investor interest was broad, including generalists who typically are not involved in the sector. Share outperformance may wait until the group again has broader investor appeal, likely when inflation risk re-emerges.

David Fuller's view Reasons for the underperformance of gold shares relative to bullion since their 2008 highs include, in my opinion, increased competition from equity and particularly bond markets. Investor interest in bonds both reflects and encourages deflationary rather than inflationary perceptions. Nevertheless inflation has picked up in the stronger economies and central banks have certainly erred on the side of future inflation with their quantitative easing. The gold market may also be temporarily subdued by a realisation that the IMF will most likely sell on the open market the portion of its available gold which India did not purchase last November.

However a more important influence, I think, is the difference in perceptions regarding the US dollar. In 1Q 2008, the US Dollar Index had entered the 8th year of a downtrend as it fell to a new all-time low. Needless to say, people were extremely bearish of greenback. Today, sentiment towards the dollar remains generally bullish, largely because of its recent rallies against the euro and sterling. I maintain that there is no fundamental reason for the US dollar to appreciate against the currencies of better performing economies, such as member states of the Asian Dollar Index. (See also Eoin's comments on currencies below.)