| |
Gold coins outshine gold shares
Alan Demby
Posted: Mon, 09 Jun 2008
[miningmx.com] -- BACK in the seventies - when gold was busy rollicking up to an all-time record peak of US$850/oz - the conventional wisdom wasn't to buy gold but gold shares.
The inescapable investment logic was that the vast majority of JSE-listed gold shares outperformed bullion - some by huge margins.
It was a time when the JSE boasted a gold board that extended to more than 60 listings of shares in gold mines, the quality of which varied widely: from low-cost, high-grade, long-life mines to high-cost, low-grade short-life mines.
Most slotted into the latter, marginal category because, facing closure in the early part of the Seventies, the soaring gold price had afforded them a new lease on life.
Many were incurring costs of $700/oz. Those were operations that would have closed had the yellow metal's price languished below $700/oz. At $710/oz a
representative marginal mine was clearing R100,000 in bottom line profit.
At $720/oz the profit doubled, since the additional $10 went straight to the bottom line; at $730/oz it trebled. Small wonder, therefore, the shares of many marginal mines handsomely outstripped the soaring gold price.
Krugerrands, which represented the only convenient way for investors to climb on to the gold bullion bandwagon, contained a lot less appeal than the shares of the marginal mines. That picture changed dramatically after gold peaked in January 1980.
Just as the gold price leverage enjoyed by the marginal mines during the bull market generated huge earnings increases, so the reverse occurred as gold entered a sharp and extended bear market.
Not only did earnings shrink, in most cases they evaporated. The mines in question either closed, were absorbed into others or were acquired by optimistic entrepreneurs confident of running them at significantly lower working costs.
No longer is the leverage effect nearly as attractive as it was 40 years ago, partly because only a handful of marginal mines are listed, the majority of which in any event have insufficient gold reserves to exploit the rising gold price.
That partly explains why, since the beginning of the millennium, the JSE gold share index has appreciated by a paltry 156% versus a 277%
rise in the US dollar gold price and a mammoth 412% increase in the rand gold price.
Quite clearly, the place to be over the past eight years was in Krugerrands, whose 412% gain has handsomely rewarded their owners in the wake of the burgeoning gold price and a systemically soft rand.
Gold share investors have sleepless nights over factors such as the risks of deep level mining, labour unrest, unexpected taxation on mining royalties, negative international perceptions of South Africa's political wellbeing and the impact of Eskom's electricity cuts on gold production.
Investors in Krugerrands suffer no such trauma. On the contrary, it's precisely the impact of those uncertainties and concerns that contribute towards the ongoing firmness of the price of Krugerrands.
As to whether or not it's a situation likely to extend itself into the foreseeable future, the prospective Krugerrand investor must assess the likelihood of the ongoing issues
prompting gold share investors' nightmares.
If the conclusion is reached that such debilitating concerns will prevail - and it's difficult to conceive of an overnight reversal of those trends - then Krugerrands are surely good value, even at their current historically elevated price.
| |
