Where did the glitter go?
Currently the ETF is outperforming the gold index
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