Failing to deliver
Metal not delivering the goods despite investment climate that appears highly favourable
THE GOLD PRICE and gold equities are frustrating investors as the metal fails to respond to the world’s greatest financial crisis since the Wall Street Crash of 1929. Since mid-September the gold price has seesawed from US$740/oz to just above $900/oz and then back down to current levels of around $830/oz.
Significantly, gold has failed to get back to the peak of $1 030/oz set in March – that despite an unprecedented rush by investors to buy gold coins, which resulted in the US Mint and the Rand Refinery temporarily running out of stock.
Gold shares have underperformed the metal over the past 18 months, although investors got a tantalising glimpse of what they’re capable of during the first week of October when gold got above $900/oz and the rand weakened sharply against the US dollar, reaching levels of US$1/R9,40.
The rand gold price was pushed into record territory around R277 000/kg, from which it’s subsequently pulled back to current levels around R247 000/kg. Such a move, if sustained, has major implications for SA’s gold producers. Share prices of the four major producers – AngloGold Ashanti, DRDGold, Gold Fields and Harmony – also responded but then pulled back when the US dollar gold price retreated.
Harmony and DRDGold are viewed as the SA gold shares with the greatest exposure to a rising rand gold price and, on 14 October, both were still 16% and 21% respectively above their price levels on 2 October.
Harmony has also opened a significant premium over Gold Fields, at trading around R90/share on 14 October compared with R75,30/share for Gold Fields. The reverse has been the norm for much of the past few years.
JPMorgan analysts Steve Shepherd and Allan Cooke published a report on 8 October calling a buy on SA gold shares due to the rising rand gold price and the fact the shares are cheap when valued on a price to net present value (P/NPV) basis.
The analysts compared the current situation to that of late 2001, when the rand gold price rose sharply due to rand weakness post 9/11 and the gold sector outperformed the SA equity market strongly during 2002. They comment: “We believe there are substantial short-term gains in prospect through exposure to Harmony and, for investors with a higher-risk appetite, DRDGold. We believe there to be a short-term trading opportunity in the SA gold sector that has the potential at worst to offer outperformance of the JSE but may also deliver material absolute capital appreciation.”
According to the analysts, SA gold shares are trading at P/NPV multiples that are “unprecedented”.
Using the gold price of $913/oz and exchange rate of US$1/R9,43 that ruled on 6 October, the analysts calculated the NPV of DRDGold at R10,83 compared with its then price of 425c/share.
Harmony’s then share price of R82,43 compared with its estimated NPV of R126, while Gold Fields was trading at R72,20 against an estimated NPV of R161,69.
Other analysts don’t see it that way. One bearish analyst said he felt gold shares were headed lower over the short term. “The international banking situation seems to have been stabilised by the widespread government interventions. There’s no need to rush into gold, and the jewellery trade is holding back on buying. I also think the weakness in the rand has been overdone and it will strengthen in future.”
Though differing opinions are what make markets, if the rand starts to slide again and gold gets back above $900/oz then JPMorgan’s numbers will become highly relevant.
Go for Gold! Steve Shepherd