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Gold’s high and low road
David McKay
Posted: Mon, 06 Dec 2004
[miningmx.com] -- THE US dollar gold price and Johannesburg’s gold index look as if they’re speaking different languages. The gold price has appreciated a third since the beginning of 2003 and 11% (around US$50/oz) over the past three months – a development clearly related to the fortunes of the dollar. And with more pain for the US economy forecast, the expectation is that flight to tangible wealth will continue.
Furthermore, gold supply problems, continuing de-hedging by producers and an interesting tolerance to gold price increases in top jewellery consumer India have led some to predict gold bursting through $500/oz or higher.
Commenting on the influence of the US economy, JP Morgan says: “The twin deficits and now even a little US inflation suggest to us further gold price upside. Our target is for $450/oz in 2006, but at the current rate of dollar weakness, we believe this
could be achieved more quickly.”
So with all this euphoria it’s interesting to note the utter absence of enthusiasm regarding Johannesburg’s gold index. In contrast to the gold price gains from the beginning of 2003, and in the past three months, the JSE Securities Exchange’s gold index has shed 21% and 6% respectively.
The seminal cause of this apparent disconnect is the performance of the rand, which has appreciated by about 32% against the dollar since the beginning of 2003. Only those gold producers with less exposure to the rand – such as AngloGold Ashanti – stand to benefit from the higher price.
The waters have also been muddied by the takeover tangle involving Harmony Gold and Gold Fields. “Harmony’s share price has reduced down to my target price, but this is largely due to the proposed takeover of Gold Fields,” says Peter Townshend, a gold analyst at Barnard Jacobs Mellet. The SA gold industry may show signs of arresting its recent losses in
the first quarter of 2005.
Nick Goodwin, a gold analyst at T-Sec, disagrees. He forecasts a R1bn net cash outflow from the sector in the quarter, bringing total net cash out of more than R4bn over the past five quarters.
All the Johannesburg gold counters, apart from Western Areas, are overvalued, Goodwin says. “The index is trading at around 1 850 points, but I’d put it at 1 200 points.” Goodwin recommends avoiding gold shares completely.
There are signs that SA gold producers are getting to grips with the stronger rand, helped by a slight R1 500/kg improvement quarter on quarter in the rand gold price.
Bernard Swanepoel, Harmony Gold CEO, says that there’s a slight 2% to 3% up-tick in revenues, though he characterises it as a flat quarter. Roughly 17% of Harmony’s gold production – 540 000oz/year – is marginal or unprofitable at last quarter’s rand gold price of around R82 000/kg. “The trick will be the extent to which Harmony can bring this output
into profits,” says another analyst.
Ferdi Dippenaar, Harmony’s commercial director, says that the company will be cash flow positive.
Gold Fields has already stated – as part of its attempt to stave off Harmony’s takeover bid – that the group margin would increase to between 20% and 23% in the first quarter of 2005. That would be due to a 6% increase in gold production and a reduction in total rand per ton costs of more than 5%. DRDGold, long the whipping boy of the gold sector, is expected to produce a small margin from its hard-hit SA operations. It has restructured so comprehensively that roughly 85% of its value is now derived from its offshore assets.
Gold supply continues to be important in gauging how the US dollar gold price will fare. Global mine supplies continue to fall, according to GFMS, a British metals research consultancy. “From a moderately higher base in 2005 of 2 650t, GFMS predicts that global output will decline by an average of 30t/year over
a five-year period to reach 2 494t in 2010.” Against that positive news the prospect of central bank sales of gold seems to have had a marginal impact. The World Gold Council says that net central bank selling is likely to rise in fourth quarter 2004 and that a new agreement among the banks to sell gold at a higher level of 500t/year would be fulfilled.
The key question is whether the banks will take advantage of the higher price and lock in some profit or worry about the world economy and hang on to gold’s safe haven value.
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