SA gold shares halt only temporary

[miningmx.com] – ANNOUNCEMENTS this week from Harmony Gold and Sibanye Gold that New York-based gold fund, Van Eck, had lifted its exposure to both companies supports analysts views that while the Johannesburg gold index has come to a shuddering halt lately, it’s only a temporary correction.

Gold shares outperformed the JSE’s Alsi for most of the year gaining roughly 50% from January to August largely on the performances of Sibanye Gold and AngloGold Ashanti.

In the last month, however, the gold index is just under a fifth lower partly owing to US dollar strength, expectations that inflation won’t be an immediate important feature and will be replaced with rising rates.

AngloGold Ashanti, which is a large constituent of the index, was also battered following its unsuccessful tilt at a $2.1bn rights issue and demerger. The dollar gold price has been under pressure falling about 4% this month.

However, in rand terms, which matters most to Harmony Gold and Sibanye Gold which produce almost exclusively from South Africa, the gold price is only 0.5% lower at some R338,000 per kilogram, about or R2,000/kg.

According to Investec Asset Management, however, the threat of inflation and geopolitical risk – especially the events in the Ukraine and the Middle East – will provide the gold price with an updraft while the possibility of merger and acquisition activity in the South African gold industry will also add some spark to gold equities.

There’s also more faith in exchange traded funds (EFTs), securities that represent actual gold holdings, than last year which saw ETF holdings decline about 33% as against a marginal 1.8% decline in the year-to-date.

“After years of underperforming the gold price we believe gold equities are finally showing leverage, as they are fundamentally better businesses than they have been in the past,’ said Scott Winship, portfolio manager for Investec Asset Management.

“We expect continued interest in gold equities this year as generalist investors look to allocate after being underweight for some time and merger and acquisition returns to the sector,’ he said.

Speaking at the Denver Gold Show recently, a long-honoured annual event where the world’s gold prognosticators, gold producers, and investors gather to mull over the sector’s ills and boons, Martin Murenbeed, chief economist of Dundee Capital Markets, said the increase in gold imports from Asia was an interesting development.

Murenbeed, who has been among the more accurate of gold market forecasters through the years, said that net imports of gold to China increased to 1,158 tons in 2013 from some 557 tons the year previously.

Asian physical demand was expected to expand in the next year while from a jewellery-buying perspective, the increase in the middle classes in India and China was forecast to give some impetus to gold demand.

David Davis, an analyst for Standard Bank Group Securities, said the strength of the US dollar “remains a major driver negatively impacting the gold price’. However, he’s positive on the metal in the medium term.

“Geopolitical crises and macroeconomic projections aside, we expect global demand for gold to outpace global supply at an ever increasing rate in the medium- to long-term,’ Davis said in a report dated October 1.

“We believe that global production will decline around 2% per annum over the next five years, brought about by the industry having to right-size its operations as a result of the decline in the gold price,’ he said.