"As always thanks for the excellent service. Could you, and/or some one from the collective please comment on the following two issues at your convenience?

"1. Recently I have read that many commentators expect the gold shares to outperform gold in the coming months/years. Would you agree with that?

"2. With the new prime minister in Japan, do you think the likelihood of an intervention on yen has increased or decreased?

"Thanks in advance."

Eoin Treacy's view Thank you for these questions which others may also find of interest. I reviewed both gold and gold shares in yesterday's Comment of the Day. It is important when one talks about relative performance to spell out exactly what one means.

The NYSE Arca Gold Bugs Index broke upwards to high highs today. Nothing has occurred to question potential for additional upside. By posting a new high gold shares are already outperforming gold on that measure.

As we have mentioned on a number of previous occasions, gold miners are interested in extending the lives of their resources. When prices are high they will exploit more difficult to reach, previously uneconomic, seams so that when prices fall they will be left with cheaper to exploit reserves. Gold miners are therefore always spending to improve the longevity of their resources. Gold prices have surged of late and outstripped the rising cost of developing new lodes. Provided comparatively higher gold prices are sustained, this should act as a tailwind for gold mining shares.

The Gold/NYSE Arca Gold Bugs Index ratio was largely rangebound between 2004 and 2008 suggesting the two instruments performed more or less in line. Gold outperformed during the financial crisis and they moved back into relative equilibrium between 2009 and April when gold again moved to outperformance. Gold hit a least a near-term peak relative to gold shares on August 8th and a sustained move back above 3.2 would be required to question current scope for continued lower to lateral ranging relative to gold mining shares.

Regarding your second question. The DPJ has an unimpressive record of appointing leaders. This article from Bloomberg suggests Yoshihiko Noda is a consensus builder. He has significant challenges ahead of him. In any case, the head of the central bank has more input on whether Japan continues in its attempts to weaken the Yen.

The Bank of Japan has intervened near ¥76 against the US Dollar twice this year, in March and August. Following a one-day intervention in August, the Yen has strengthened again and is currently ranging mostly above ¥76. I suspect the odds of another intervention are better than even but efforts to date have been half hearted. If the Bank of Japan is serious about weakening the currency it will have to deploy significantly more capital to achieve its goal.

The Swiss National Bank has, so far, had more success in weakening the Franc. Their resolve is currently being tested with a stiff rally over the last 3 days to complete a weekly key reversal. A sustained move above CHF1.20 will be required to break the almost four-year progression of lower rally highs and signal a return to Euro medium-term demand dominance.