Where did the glit­ter go?

Cur­rently the ETF is out­per­form­ing the gold in­dex

Finweek English Edition - - Companies & markets - DAVID MCKAY

SA GOLD SHARES have se­ri­ously un­der­per­formed the gold­backed ex­change traded fund (ETF), known as New­Gold, launched in Novem­ber 2004 by Absa Cor­po­rate & Mer­chant Bank (ACMB). A ques­tion now be­ing posed is whether SA gold com­pa­nies have sud­denly lost their famed lever­age to the price of gold. The de­bate is quite in­tensely ar­gued.

A fas­ci­nat­ing re­port by JP Morgan’s Steve Shep­herd, pub­lished on 22 Fe­bru­ary, shows that since in­cep­tion, New­Gold has out­per­formed the SA gold shares by 25%. This is not­with­stand­ing the gold bull mar­ket which has seen the rand price of gold gain 83% in the same pe­riod, and the dol­lar price by 57%, says JP Morgan. Com­pare this to how SA gold stocks have fared: a mere 45% higher in rand.

Shep­herd won­ders whether the gold min­ers have been min­ing lower grades in re­sponse to higher gold prices, a de­vel­op­ment that would de­stroy profit gear­ing in the gold shares. There’s also the broader con­clu­sion that con­sol­i­da­tion in the gold mar­ket, at ex­tremely large pre­mi­ums, has helped de­stroy value and turned in­vestors off.

Fi­nally, it’s ar­gued, An­gloGold Ashanti’s over­hang (its par­ent firm An­glo Amer­i­can has sig­nalled its in­ten­tion to sell the re­main­ing 41% in the com­pany) has had a neg­a­tive ef­fect on the SA gold in­dex. There may be rea­sons to think SA gold shares could re­turn to vogue, but ETFs have ca­chet: “All this said, we con­tem­plate how at­trac­tive it may be in a gold bull mar­ket to cre­ate gear­ing around gold ETFs through the use of deriva­tive struc­tures,” says Shep­herd in his re­port.

Vladimir Nedeljkovic, who works in ACMB’s cap­i­tal and debt mar­kets and is at the front of the New­Gold van­guard, says man­dates fre­quently stop in­sti­tu­tions from buy­ing a call op­tion on New­Gold where in­vestors ben­e­fit if the price of gold rises. “We are ac­tively mar­ket­ing the prod­uct. But there’s al­ways some in­er­tia,” he says.

For all its out­per­for­mance, New­Gold hasn’t set SA alight. An in­sti­tu­tion re­cently bought an ad­di­tional 16 000 oz of New­Gold, says Nedeljkovic. But in its two-year ex­is­tence, to­tal as­sets in New­Gold stand at 340 000 oz, or R1,6bn in in­vest­ment. “It’s a ques­tion of man­date. A gold eq­uity fund can only buy shares.”

In­ter­na­tion­ally, the gold ETF phe­nom­e­non has blos­somed. StreetTracks, a prod­uct launched in New York through the World Gold Coun­cil (WGC), has notched up $10bn in as­sets. As such, it’s the fastest grow­ing ETF in his­tory and the sev­enth largest in the US, says the WGC.

So while the im­me­di­ate fu­ture for ETFs is se­cure in SA, at least in the short term, what’s the fu­ture for SA gold shares? Ac­cord­ing to David Davis, a gold an­a­lyst for Credit Suisse Stan­dard Se­cu­ri­ties, gold shares are merely wait­ing for the right con­di­tions.

“I be­lieve that the mar­ket is dis­count­ing gold shares sig­nif­i­cantly be­low the spot price of gold be­cause they have not got their safe haven sta­tus,” says Davis. A sud­den in­crease in the oil price, pos­si­bly to around $65/bar­rel, in turn ow­ing to a po­lit­i­cal dis­tur­bance, would see gold shares win new favour, he says. “Gold shares tend to get bought on po­lit­i­cal fears, or bad eco­nomic news,” says Davis.

Says a fund man­ager who asked not to be named: “It doesn’t take a ge­nius to see gold shares haven’t per­formed. We’re in­ter­ested in buy­ing gold shares this year.”

Cre­at­ing an al­ter­na­tive to gold shares. Vladimir Nedeljkovic

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