Fancy a new toga?
History shows us bullion retains its buying power. But what about much neglected gold shares?
THE STORY GOES that in the days of Rome’s empire an ounce of gold could buy you a rather fetching toga. These days the same weight of gold will buy you a rather nice suit, possibly of the Italian kind. The moral? Well, those who subscribe to such mythologies say it’s about how gold retains its buying power while paper money – such as the US dollar – is losing its.
In fact, gold is rapidly increasing its buying power. At the time of writing, the price of gold was through US$1 600/ oz – an all-time record. The question for investors is: Does it still make sense to put money directly into the metal through an exchange-traded fund (ETF) or is South Africa’s much derided gold stocks the way to go?
The HSBC says the big names in gold shares – the likes of Newmont Mining, Barrick Gold and AngloGold Ashanti – have been discounting on a much lower gold price: around $1 300/oz against the current level. “We see potential near-term rerating of up to 20%, particularly for the larger cap names, with further upside beyond that,” says Patrick Chidley, an analyst at the bank.
Says RBC Capital Markets: “Most senior golds are 10% to 20% below their 52-week highs – with AngloGold Ashanti, Gold Fields and Kinross Gold having the greatest upside to their 52-week highs.” Since that report was written, SA’s gold index has gained almost 10%, so there’s still time to pile in. Only that…
Will South African gold shares ever perform as well as the metal, especially if you give credence to some expectations the gold price will force its way through $2 000/oz, especially as distress continues apace in Europe? In January, JPMorgan suggested 2011 would be the year gold shares outperformed the metal. However, the stockbroker was betting on a gold price of $1 463/oz.
What’s holding our gold counters back is what was described in a recent Merrill Lynch report as “The South African discount”. JSE-listed gold shares used to attract “the gold premium” – but that’s since been replaced by a witch’s brew of negative factors, from restive labour to the renewed threat of power shortages to a long range of other stuff: the threat of nationalisation and class action suits related to silicosis, a disease some claim gold miners contract.
“Most of those issues aren’t new and therefore largely reflected in the ‘ South African discount’,” says Bruce Alway, an analyst at Merrill Lynch. “Furthermore, with rising resources, nationalism a global – not just a domestic – issue, on a relative basis the country discount shouldn’t dramatically widen, in our view.”
The safest approach to South African gold stocks is to understand which have the best exposure. Leon Esterhuizen, a gold analyst at RBC Capital Markets, in a recent report said 61% of AngloGold Ashanti’s production was from outside SA compared with Harmony Gold, where 92% of its total production is local. So the decision should be clear – if it’s gold stocks you want.
But here’s the sting in the tail. Over the past year Harmony Gold has out- performed AngloGold Ashanti and Gold Fields on a relative basis. Why? Well, there’s that mammoth gold deposit sitting in Papua New Guinea that Harmony wants to develop and which could change the shape of the company, possibly inviting a mouth-watering control premium. As veteran gold analyst Nick Goodwin has often commented: gold shares are for trading, not holding. If it’s young Johnny’s education you’re investing for, the choice might be to go for gold.