Exceptional – though the driving forces remain obscure to many investors
OVER THE PAST SIX MONTHS gold shares have been good to investors – very good. In US dollars the price of South Africa’s former flagship – AngloGold Ashanti – is up by 200% since October 2008. And that was while the consensus views of analysts collected by Thomsons Financial consistently allocated a poor rating of 2,6 to those shares (1 equals perfect buying opportunity; 3 definitely sell). The share price of British American Tobacco (BAT), which enjoys a nearly perfect rating of 1,3, performed poorly over the same period – even against a very weak US dollar.
Prospective investors in gold shares mustn’t try to be too smart with their own analysis and selection. Pick your preferred gold share. For many investors in SA that’s Harmony Gold. Buy and sell the share as your faith in gold and the US dollar goes up or down. Also think about the price of gold shares in US dollars. For those who believe in gold, gold and gold shares are in fact there to protect investors against the US dollar, whose value can only fall now that the United States is issuing new dollars and creating credit at an unprecedented rate.
Fundamental considerations should definitely not play any role in the choice of a specific gold share. Traditional investment values, such as dividend yield, apparently don’t seem to count in determining the value of a gold share. According to Thomsons Financial’s analysts, not one of the world’s leading gold mines will pay enough cash dividend in 2009 to give investors a return of more than 1% on their current share prices. And as a business, gold shares have no place in a Warren Buffett portfolio. Not one of the biggest gold mines currently brings in a return on equity (ROE) of more than 15%.
Nevertheless, their share prices have increased excellently and they are this year’s top performers in any portfolio. The popular Smartmoney website – with its equally popular “Map of the Market” – gives seven gold mines as world players. The diagram shows the seven mines and allocates each one an amount of space in relation to its market capitalisation.
Barrick and Goldcorp, with market values of nearly US$33bn and $29bn respectively, are the biggest and supposed to attract the most attention. SA’s two players – AngloGold, with a market value of $15bn, and Gold Fields, with $8,87bn – are minute by comparison. However, their share prices – which have increased in US dollars by 53% and 37% respectively this year – are attracting considerably more attention.
The market value of gold shares, even though it’s now already being expressed in billions of dollars, is still relatively small compared with other investments. The total market capitalisation of the seven shares in Smartmoney’s diagram is just over $130bn. The market value of Microsoft, one of the US’s biggest listed shares, is $185bn. Even Buffett’s Berkshire Hathaway weighs in at $116bn.
Investors who prefer smaller gold mines, those previously called marginal mines, will see there’s nothing much on the JSE besides the three big guns of AngloGold, Gold Fields and Harmony. In fact, Harmony, with its market value of R41bn or around $5bn, should also appear on Smartmoney’s diagram. If those three are omitted there are 13 other gold mines the JSE could place in the gold mining sector: most are almost a joke.
Four are suspended listings and have no value. Village, with a market cap of R5m, doesn’t even qualify for the AltX market. And Halogen, whatever it might be, with a market value of R27m – if you can find a buyer for 10 of its shares – probably doesn’t belong on the JSE either. The shares of African Eagle and Pan African Resources, each with a market value of just more than R100m, sometimes trade quite well.
The choice in gold on the JSE for prospective investors who don’t like the three big guns is limited to Great Basin, DRD Gold, Simmer & Jack and Witwatersrand Cons Gold.
Gold itself – since its low in October last year, its price has increased from $725 to currently just under $1 000 – is often a safer option if investors aren’t sure of the driving forces behind the share prices of individual gold mines.
For a direct investment in gold, Absa’s NewGold (JSE code GLD) is certainly the easiest alternative. Proof Kruger coins, obtainable from the SA Mint, are also a good investment and it’s nice to boast owning the nice case and the shiny gold coins, which now cost nearly R10 000 each.