SA gold shares near ‘inflection point’


[] — HOW long will South African gold shares continue to slumber? One would have thought the sudden strengthening of the rand this week to 7.4 against the dollar would compel investors back into AngloGold Ashanti and Gold Fields which, in keeping with their international peer group, have underperformed this year. But no, not significantly . Not yet anyway.

However, there’s growing belief that South African gold shares will quickly catch up to the breathtaking improvement in the rand gold price.

The South African gold index has gained a mere 7.6% in the last twelve months from 2,600 to 2,800 points. But in rand terms, the gold price for South African producers has gained nearly 46% over the same period, from R295,360 per kilogram in October 2010 to R430,976/kg today.

A report by UBS believes there’s an “inflection point’ developing. In a report dated September 8, the Swiss bank says: “We argue that an inflection point is nearing whereby revenues accelerate away from the costs, driven by a structural shift in the gold market’.

Why have gold stocks struggled so?

One of the reasons is the alternative provided by exchange traded funds. Global ETF holdings, as of early September, were up six million ounces holding total investment of some 75 million ounces. The reasons investment was driven there rather than into the equities was because investment correctly recognised the margin compression caused by power, fuel and labour cost pressures.

A lack of ability in creating organic growth and the significant premiums being paid by gold producers in the merger and acquisition market – such as Barrick’s pursuit of Equinox, a Zambian copper play – also deterred investors, the feeling being gold producers were struggling to create clear-cut value.

“One rarely goes wrong purchasing good value, and mining shares in general represent good value in my view,’ says James Turk, a long-standing gold bull and founder of Gold Money, an gold and silver investment site.

Earlier this week, he backed up the optimism by buying through a trust in which he has an indirect beneficial interest, some R800,000 worth of DRDGold shares; about 200,000 shares at R4/share.

“I don’t mind being patient if I can buy something that represents good value. So I am not too bothered if my timing proves too early,’ says Turk, who’s also a non-executive director of DRDGold.

AngloGold Ashanti CEO, Mark Cutifani, says he’s relatively untroubled by the underperformance this year of AngloGold Ashanti, although he hastens to add that based on share price, the company has outperformed all its global peers over the last four years. “It will come,’ he says of the share price. “Quite often investors are not sure whether the commodity’s price is right so there’s always a lag in the share price,’ he says.

After a period of apathy, neglect and disbelief, stemming from the collapse of Lehman Brothers in 2008, investors – most probably value players – are returning to equities in general, says Turk. “People threw out the baby with the bathwater after the Lehman collapse. They sold shares because they could, not because they wanted owing to the rush for liquidity,’ he says.

Turk believes a second stage in the bull market is now forming. After value investors, momentum and hedge funds will show interest in the gold sector as recognition of its value develops, he says.