TALK­ING TECH­NI­CALS

Market ex­pects a large in­crease in prof­itabil­ity at the gold mines

Financial Mail - Investors Monthly - - Contents - GARTH MACKEN­ZIE www.trader­scorner.co.za

After spend­ing the months be­tween March and Au­gust in a trad­ing range of be­tween US$1,220 and $1,300, the gold price broke out through the up­per end of it in late Au­gust.

The strength since early July and the sub­se­quent break­out can be at­trib­uted largely to a weak US dol­lar over the past few months.

That cur­rency has in fact weak­ened through­out 2017; the US dol­lar in­dex has lost al­most 12% since Jan­uary. This weak­ness has ac­cel­er­ated since July, which has contributed in no small part to the gains in the gold price.

That, to­gether with ris­ing geopo­lit­i­cal ten­sions be­tween the US and North Korea, makes for a cock­tail that is rather pos­i­tive for safe-haven as­sets such as gold.

Tech­ni­cally, the break­out above $1,300 is very bullish for the metal. If one takes the higher of the $80 range that was in place from March to Au­gust, and projects that onto the point where the break­out oc­curred, it opens a tar­get of $1,380.

Gold looks well on its way to that tar­get level, which con­ve­niently ties in with the highs from mid-2016.

For now it ap­pears as if the gold price has the bit be­tween its teeth and may run to $1,380 be­fore it be­gins to con­sol­i­date. In the $1,380 area it would not be too sur­pris­ing to see some profit-tak­ing be­gin­ning to emerge and for the price to con­sol­i­date at that re­gion.

A healthy con­sol­i­da­tion be­low about $1,380 would be con­struc­tive to al­low the price to re-set be­fore an­other even­tual leg higher to break through $1,380. Time will tell, and that anal­y­sis prob­a­bly needs to be done later, once the price has be­gun to show the way.

Lo­cally the JSE gold min­ing in­dex has ben­e­fited from the rise in the gold price since July, with mag­ni­fied gains. A firm rand (as a con­se­quence of a weak US dol­lar) has, how­ever, pro­vided a head­wind for lo­cally listed gold min­ing shares. Nev­er­the­less, the no­tion that SAlisted gold shares are a lever­aged play on the gold price has proven to be cor­rect re­cently.

The JSE gold min­ing in­dex (J150) has gained 27% since the start of July. Over the same time the gold price has gained 10%. The lever­aged na­ture of SA gold min­ers is clear to see from the re­cent trad­ing ac­tion.

This re­la­tion­ship ex­ists be­cause of the mar­ginal na­ture of gold min­ing shares. A 10% rise in the dol­lar gold price trans­lates into a much larger gain in prof­itabil­ity in the gold min­ing companies. Gold shares typ­i­cally gain when their profit mar­gins widen. The way gold shares have been per­form­ing re­cently cer­tainly sug­gests that the market is ex­pect­ing a large in­crease in prof­itabil­ity at the gold mines this year.

Tech­ni­cally, the JSE gold min­ing in­dex held lat­eral sup­port at 1,170 in July and bounced off that level. The in­dex has been range bound be­tween 1,170 and 1,600 since De­cem­ber 2016. The pat­tern of ris­ing lows and ris­ing highs that has been ev­i­dent on the gold price re­cently makes it look as if there is a trend of SA listed gold pro­duc­ers con­tin­u­ing to gain value.

A move to the up­per bound­ary of the year-to-date trad­ing range at 1,600 looks fea­si­ble. While this is the case, it seems the SA listed gold min­ing stocks re­main a buy on dips for the fore­see­able fu­ture.

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