The lagging gold shares
We have the gold price at levels not seen since December 1996 (and platinum at 20 –year highs) yet the shares are not performing. One obvious reason for the poor performance of these shares is the rand, which had see-sawed between R620 and R13,60 and back down to R8,56 on Friday all within the past two years. The media appear to be fixated on this cause for lacklustre prices, yet the same situation is rampant in the US, where currency changes has no direct or immediate effect on the prices of their own gold shares. Yet, if one studies the gold index in relation to the rand price of gold, the lagging effect is not so obvious. Yes, the prices of gold shares are not responding on a day to day basis to what is happening to the rand price of gold, and definitely not to the dollar price, but at least part of that non-reaction is imported from the US market where there are two factors that seem to play a role in this lack of follow through in equities.

The first is the syndrome that has developed over the past two years of the gold bull market. Investors have joined the speculators in buying gold shares when the gold price is showing signs of weakness and selling them when the gold price improves to bank the profit – a process that was also widely recommended by various analysts and advisors. It was a successful tactic, as the gold price moved higher in fits and starts. As soon as it had gained a few dollars, the price would sink again and investors who had waited to open a position until it seemed the gold price was on track, were disappointed when it fell away again just as they though they were going to show a good profit.

With enough fingers being burnt over the past two years, and more severely so in the 6-month period during which the price turned very volatile in its attempts to break above the 5 barrier, a good move higher by gold was a signal for holders of stock to begin to take profit and for prospective buyers to retreat from the market and wait for the gold price to decline again.

The move from 5 to 0 had that reaction and the week-long retreat by gold back to the 0 proved that this tactic was the right one. When gold moved from 0 to 0, the profit taking intensified and the prices of gold shares showed little or no improvement – partly because the firming rand added to the nervousness in the market. Then, when gold continued higher to the 0 level, with the rand still doing well against the dollar, gold shares again did not respond.

Now, with the gold price seemingly on its way to 5 or lower and share prices also reacting, we may well begin to see some interest in equities on the premise that the same pattern is repeating itself and that the time to open new positions is near.

A second reason can be found in rumours that US institutions are shorting all major gold shares in the belief that is the fears of war dissipate, for whatever reason, the gold price will collapse back to below 0 and probably to below 5. If that happens, they stand to make a small fortune on the number of shares that are said to have been shorted.

However, if the author’s belief that there has been a real fundamental shift in the bullion market, from the excess supply of the 1996-2001 period to a situation where demand is now consistently higher than supply – partly because the source of the excess gold that had caused the 1996-2001 decline in the gold price is drying up – then it may well be that the gold price will no longer make meaningful corrections to afford the speculators the opportunity to ‘play the market’. Then it will become a case of ‘buy and hold’, because demand for gold shares will exceed the available supply by a wide margin, so that once shares have been sold it could prove difficult or costly to regain the position.

And if the short players have to start covering in a climate where holders are no longer eager sellers, prices of gold shares can move very steeply higher.

Perhaps gold has to penetrate the 0 level before the fact of the new trend really sinks in, but by then it might be too late to avail oneself of what a few weeks from now may be thought very cheap prices for the unhedged gold mines.


Daan Joubert
www.sagolds.com
www.HugoCapital.com