Fed decision adds lustre to gold stocks

GOLD shares led a rally on the JSE yesterday as the bullion strengthened following the US Federal Reserve’s decision to hold off hiking interest rates yet again as it signalled confidence on a positive outlook for the global economy.

The news on Wednesday that the Fed was open to hiking rates in June resulted in the firming of the rand to R14.39 to the US dollar from R14.61 to the dollar as the US currency weakened somewhat, from $1.13 to $1.14 to the euro.

AngloGold Ashanti rose by 6.15 percent to R220.10 a share, Harmony Gold rose 6.11 percent to R47.74, while Gold Fields rose by 5.08 percent to R60.63 and Sibanye Gold was 5.21 percent up to R52.34 at the JSE close yesterday. The rally meant further good news for Anglo-Gold Ashanti and Gold Fields after international ratings agency Standard & Poor’s (S&P) on Monday revised their outlook from negative to stable.

Meryl Pick, an equity analyst with Old Mutual Equities, said the main driver of the surge in the shares was the Fed’s decision, but warned that the rally could be short-lived.

“Gold has rallied a bit today, but it is a short-term movement. We will have to wait and see how sustainable the strengthening of shares will be as the Feds are talking about possibly increasing rates later in the year. This could put a damper on the companies,” Pick said yesterday.

Domestic and global mining companies have been adversely affected by low commodity prices since 2008.

Annabel Bishop, the chief economist at Investec, noted that commodity prices were rising. “Commodity prices have risen from a low point in November 2015, lifting particularly in March and April, which has also assisted the domestic currency stronger, as South Africa is a substantial commodity exporter but mainly of metals and minerals, which have seen less price improvement than the other commodities,” she said.

Bishop said along with global risk-on into emerging market assets, the rand pulled back from close to R14 to the US dollar from R17 to the dollar in January. She indicated the rand then rebounded slightly weaker to R14.20 to the dollar, which was a key resistance level.

“Global events continue to be the main driver of domestic currency strength,” she said.

The Fed’s decision came as South Africa continued to await ratings agency Moody’s outturn on its current assessment of South Africa’s credit worthiness, which was widely believed to be a downgrade to align its ratings closer to S&P and Fitch’s sovereign ratings of the country, Bishop said.

Bishop said S&P would probably downgrade the country this year on the local currency front (currently BBB+, to BBB), not the hard currency one (now BBB-) to bring greater alignment (and equate it with Fitch’s ratings).

“This could occur on June 3, and is not expected to deliver a subinvestment grade outcome, although one is always possible,” she said.

“While no downgrade to subinvestment grade this year is in our expected case, it forms a marker for the down case scenario. Markets may have somewhat reduced the speed factored in their expectations that South Africa is seen to take to eventually reach speculative grade, which may also have supported the rand recently.”

Bishop noted that it was likely that S&P could revise local currency ratings even lower, to BBB- next year at the earliest (from the expected downgrade to BBB this year), if economic growth remained very weak and government spending was not further curtailed. “The next step (the down case scenario) could then be subinvestment grade,” Bishop said.

Domestic and global mining companies have been adversely affected by low commodity prices.