The local market continues to trade in low volumes as investors await stronger offshore leads, while gold miners are suddenly looking very attractive.

The local bourse has managed to start the new week on the front foot, albeit fairly unconvincingly as volumes continue to be on the low side. Although, that’s not too surprising given the very low volume leads from the US late last week. The gains seen on Wall Street during Friday’s half session are being treated fairly sceptically as well.

With very little in the way of local data due in the next few days, domestic fortunes are going to be dictated by what happens offshore as market participants return from Thanksgiving Day holidays. This will give us a much better idea as to how the market is feeling.

Markets have had a pretty good bounce from the lows so we will likely need to see further positive news if the rally is to continue. The most positive development, in my view, would be for the markets to consolidate recent gains and trade sideways for a week or so. This would give us much more confidence that stocks have reached a level where underlying buying support is enough to limit further downside price action.

If we can get through the remainder of the month without any big down days then we could enter December in good shape for a solid Santa Claus rally. Whilst there’s a lot of uncertainty, news pointing towards a fiscal cliff deal could easily be the driver of such an event.

Is it time to buy gold miners?

Australian gold names are looking attractive following the huge underperformance versus gold prices over the past 6 to 12 months.

As you can see in the chart below, US dollar denominated gold prices are up just over 2 per cent over the last 12 months, while Australian gold stocks, as measured by the All Ordinaries gold index, are down nearly 20 per cent.

Source: Iress

There isn’t one standout reason behind this underperformance but rather a series of smaller factors. There have been multiple examples of operational underperformance from established gold miners which, in an effort to mitigate stock specific risk has resulted in a move toward gold ETF’s for gold exposure.

Also, a large proportion of ASX-listed gold stocks fall into the small to mid-cap market capitalisation category, meaning that during periods of ‘risk off’ sentiment, they fall much more when compared to their large cap counterparts.

Looking ahead, the outlook for gold appears neutral to slightly bullish. According to consensus forecasts from Bloomberg below, the average estimate of 24 analysts suggests gold will average $US1830 per ounce in the second quarter of 2013 and $US1900 per ounce by the fourth quarter 2013.

Source: Bloomberg

I agree with the consensus and believe gold will remain very well supported going forward, especially over the next year. With this in mind, it would appear that gold miners are currently worth looking at for investment opportunities.

A recent broker note from Morgan Stanley has highlighted its best picks in the sector. It rates Newcrest Mining, Alacer Gold, Medusa Mining and Gryphon Minerals as overweight recommendations, with each having at least 20 per cent upside potential based on target price forecasts.

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