While Few are Watching …

Over the years we have made many notes of small things we observe in various market sectors, as they often come in useful when pondering trading decisions. In the bear market of the highly cyclical gold sector in recent years, one of the things that seems to be happening with unwavering regularity, is that as year-end approaches, many of the stocks that have been beaten down the most will suddenly begin to recover and often rally sharply for several weeks.

 

Photo credit: Anglo Platinum

 

Partly this is due to tax loss selling effects wearing off. Most institutional investors finish their tax loss selling shortly before the end of October, while individual investors will as a rule tend to engage in tax loss selling until December. Traders know that beaten down small cap stocks that are especially weak into year-end will tend to outperform early in the new year, as tax loss sales are often reversed as the new year begins. As an example, consider the action in the junior gold miners ETF GDXJ in late 2014 – early 2015:

 

1-GDXJGDXJ during the 2014 tax loss selling period and the rally thereafter into late January 2015. Almost 45% were gained in the space of five weeks – this is not to be sneezed at – click to enlarge.

 

Naturally, movements in the gold sector are also driven by the action in the precious metals, but the strong influence of the tax loss selling period is undeniable, especially if one considers the action in gold mining stocks relative to gold in the time period shown above:

 

2-GDXJ-gold ratio, 2014-2015GDXJ relative to gold in the 2014-2015 tax loss selling period and its aftermath. This nicely illustrates the impact of tax loss selling and strategies trying to profit from it – click to enlarge.

 

Since traders try to anticipate this effect, it usually starts and and ends earlier than one would normally expect. Thus, as soon as anticipatory buying aimed at benefiting from the rebound in January outweighs the remaining tax loss selling pressure, the price low is put in and prices reverse. The lead and lag times vary slightly, but have been quite similar in recent years.

However, the title of this post says “Marginal Gold Producer Takes Off”, which brings us to a specific stock, the action of which we have (we think) a fairly good handle on, and which we have actually often used as a leading indicator when it started behaving in an unusual manner.

Please note that this is emphatically not a recommendation to chase this stock, especially as it has just risen so much in such a short time that it seems quite ripe for at least a short term pullback (which may came now or later – we simply don’t know). Readers must decide for themselves how they want to use the information presented here. However, we will provide links to more background information at the end of this post for those who wish to research the situation further.

 

Harmony Gold as a Plaything and an Indicator

South African gold mining company Harmony Gold (HMY) hasn’t had it easy in recent years. Once led by Bernard Swanepoel, a star manager who seemingly could do no wrong and appeared to have found a fool-proof formula for turning around aging South African deep level gold mines, it fell on hard times after a failed attempt to take over Goldfields in the mid 2000ds.

The litany of woes is well known: South Africa’s gold production seems to be in perennial decline, and the companies operating the oldest mines all struggle with declining grades, rising costs and lately with a stagnant gold price as well. Note that the gold price has actually just broken out to a new all time high in Rand terms, but it has been close to this level for more than four years now, hence we are saying it was “stagnant”.

 

3-gold in randGold in terms of the South African Rand – click to enlarge.

 

Stagnant won’t do when your work force demands raises between 10% to 15% every two years, often goes on strike (sometimes for reasons unrelated to wages) and your state-owned electricity provider is in such a god-awful mess that it cannot guarantee an uninterrupted power supply and moreover constantly jacks up its prices, as it is unable to meet demand.

Harmony Gold has tried various ways to escape the trap it is in. One consisted of making a huge high grade copper-gold porphyry discovery in Papua New Guinea, 50% of which it sold to Australia’s Newcrest, as Harmony wouldn’t be able to swing the necessary investment to develop it on its own. “Huge” by the way means a minimum of 40 million ounces of gold-equivalent at grades that far surpass those of many currently operating gold-copper porphyry mines in South East Asia. Given that production is still years away and the market currently values this asset at less than zero, we can state that the plan hasn’t yet worked as intended.

The other thing Harmony (and other South African miners as well) is implementing, is to deploy ever more sophisticated mining technology. There have recently been breakthroughs in mechanized deep level mining that allow for much more selective and effective mining methods. We refer you in this context to the sudden turnaround at Goldfields’ South Deep operation (formerly known as Western Areas), one of the biggest gold deposits on the planet, where these new techniques have been successfully established. Harmony’s quarterly production at its SA mines has increased by 17% last quarter, which at least in part seems to be the result of such efforts as well.

What one needs to know about Harmony as a trader and investors is mainly the following: the company is a marginal producer, but cash-flow positive at current gold prices (although it still reports headline losses). In fact, among mid-sized producers (1-2 million ounces p.a.), it is probably the most marginal. Its advantage is a fairly solid balance sheet with a small debt load (it has actually reduced its debt by ZAR 1.1 billion in early December. Previously – as of 30 Sept. 2015 – its net debt amounted to ZAR 2.64 bn.). This means it can survive for quite some time, even when faced with difficult problems.

The other thing one needs to know is that the stock has some peculiar characteristics. In the past it has often tended to lead short term turns in the gold sector. There was a time when we used it as an “intra-day trading alarm”. If the entire gold sector was trading down, but HMY turned up, it was a signal to go long the sector for a trade. This leading indicator function hasn’t worked as well in recent years as during the bull market, but traces of it remain. At the moment we may be in a time period in which the currency effect becomes an overwhelming driver of the stock – this happened e.g. also in the 2000-2001 period. Anyway, the tax loss selling effect is very pronounced in HMY as well and the stock tends to really move big when its time comes. Here is what is has done lately:

 

4-HMY, daily, todayAfter getting clobbered in the usual tax loss selling waves, HMY rises by 64% in two weeks – click to enlarge.

 

Although the news reported by the company recently were surprisingly good, it has actually not reacted much to these news. Tax loss selling has simply overwhelmed everything else. Now however, the stock has woken up. Note that there is one additional reason why HMY performs especially well at this time of the year: it is summertime in South Africa, and electricity tariffs are lower. Traditionally, this is its strongest quarter – so it gets an extra fillip from that.

Let us look at what happened in the 2013/14 and the 2014/15 tax loss selling periods:

 

5-HMY-2013-2014 rallyAfter the mid-December tax loss selling low, HMY rose from $2.35 to $3,80 in three months; a rising gold price extended the move in terms of time. The company was in poor shape operationally at the time, something that has recently changed – click to enlarge.

 

6-HMY-2014-2015 rallyThe 2014-2015 instance wasn’t too shabby either – a rally of 107% in the space of a little over 9 weeks (from $1.54 in early/mid November to $3.18 in mid/late January) – click to enlarge.

 

Well, what a nice trading sardine, with a built-in timer to boot! Our personal opinion is that the recent advance – as big as it has already been in percentage terms – is likely only the beginning of this year’s turn-of-the-year rally (even though as we noted above, it seems now short term overbought and due for at least a pullback). Of course, there is the big caveat that Ms. Yellen’s planned rate hike could upset the apple cart if no “buy the news” scenario eventuates in gold. Nothing is ever certain, and this year we are certainly facing exceptional circumstances.

 

Conclusion

We have both a recurring short term trading opportunity here, as well as a potential signal for the entire gold sector. After all, why would the stock of the most marginal producer be leading to the upside at present? Very often this is a hint that the gold price will soon start to rise as well (of course the Rand gold price has indeed just broken out, so keep the currency effect in mind – the dollar gold price may only follow with a lag, as e.g. happened in 2000/2001).

In any case, there are also interesting fundamental developments at HMY, given the recent sharp improvement at its SA operations. Luckily for investors it has a truly excellent and highly informative web site, where all relevant data are presented in painstaking detail. Readers who want to take the time to research the company’s fundamental situation should take a look at these links:

 

Reporting

Company announcements

Fact sheets

Presentations (here look especially for updates on Wafi-Golpu, the PNG discovery. The most recent one is from 24. November 2015)

 

Lastly, here is something that doesn’t happen very often in gold stocks – insider buying on the open market.

 

Charts by: StockCharts

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “Marginal Gold Producer Takes Off”

  • SavvyGuy:

    > Although the news reported by the company recently were surprisingly good, it has actually not reacted much to these news.

    Whether good, bad or just plain boring…”news” is always singular!

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • TMS-2 fast versionA Date Which Will Live in Infamy
      President Nixon’s Decision to Abandon the Gold Standard Franklin Delano Roosevelt called the Japanese “surprise” attack on the U.S. occupied territory of Hawaii and its naval base Pearl Harbor, “A Date Which Will Live in Infamy.”  Similar words should be used for President Nixon’s draconian decision 45 years ago this month that removed America from the last vestiges of the gold standard.   Nixon points out where numerous evil speculators were suspected to be...
  • Perfect-InvestmentInsanity, Oddities and Dark Clouds in Credit-Land
      Insanity Rules Bond markets are certainly displaying a lot of enthusiasm at the moment – and it doesn't matter which bonds one looks at, as the famous “hunt for yield” continues to obliterate interest returns across the board like a steamroller. Corporate and government debt have been soaring for years, but investor appetite for such debt has evidently grown even more.   The perfect investment for modern times: interest-free risk! Illuustration by Howard...
  • web-puzzled-man-scratching-head-retro-everett-collection-shutterstock_91956314News from TINA Land
      Distortions and Crazy Ideas We have come across a few articles recently that discuss some of the strategies investors are using or contemplating to use as a result of the market distortions caused by current central bank policies. Readers have no doubt noticed that numerous inter-market correlations seem to have been suspended lately, and that many things are happening that superficially seem to make little sense (e.g. falling junk bond yields while defaults are surging; the yen rising...
  • mania1The Great Stock Market Swindle
      Short Circuited Feedback Loops Finding and filling gaps in the market is one avenue for entrepreneurial success.  Obviously, the first to tap into an unmet consumer demand can unlock massive profits.  But unless there’s some comparative advantage, competition will quickly commoditize the market and profit margins will decline to just above breakeven.   Example of a “commoditized” market – hard-drive storage costs per GB. This is actually the essence of economic...
  • trump-and-hillary-exlarge-169US Presidential Election – How Reliable are the Polls?
      Is Clinton's Lead Over Trump as Large as Advertised? Once upon a time, political polls tended to be pretty accurate (there were occasional exceptions to this rule, but they were few and far between). Recently there have been a few notable misses though. One that comes to mind is the Brexit referendum. Shortly before the vote, polls indicated the outcome would be a very close one, while betting markets were indicating a solid win of the “remain” vote. The actual result was around 52:48...
  • Lighthouse in Storm --- Image by © John Lund/CorbisSilver is in a Different World
      The Lighthouse Problem Measured in gold, the price of the dollar hardly budged this week. It fell less than one tenth of a milligram, from 23.29 to 23.20mg. However, in silver terms, it’s a different story. The dollar became more valuable, rising from 1.58 to 1.61 grams.   Who put that bobbing lighthouse there? Image credit: John Lund / Corbis   Most people would say that gold went up $6 and silver went down 43 cents. We wonder, if they were on a sinking boat,...
  • storming the storeRetail Snails
      Second Half Recovery Dented by “Resurgent Consumer” We normally don't comment in real time on individual economic data releases. Generally we believe it makes more sense to occasionally look at a bigger picture overview, once at least some of the inevitable revisions have been made. The update we posted last week (“US Economy, Something is Not Right”) is an example.   Eager consumers storming a store Photo credit: Daniel Acker / Bloomberg   We'll make an...
  • The CongressThe Fed’s “Waterloo” Moment
      Corrupt and Unsustainable James has been a big help. Trying to get him to sleep at night, we have been telling him fantastic and unbelievable bedtime stories – full of grotesque monsters... evil maniacs... and events that couldn’t possibly be true (catch up here and here).   He turned his head until his gaze came to rest on the barred windows of the main building. Finally, he spoke; as far as I was aware these were the first words he had uttered in more than five years....
  • BuffettGold and Silver Supply and Demand Report
      The Famous Buffett Quote The prices of the metals didn’t change much this week. We thought we would take this opportunity to quote Warren Buffet. A comment he made at Harvard in 1998 earned him the scorn of the gold community.   Warren Buffett no doubt is a good investor; but he is also one of the biggest beneficiaries of the vast monetary inflation since the 1970s, a wind that has been at his back ever since. He also doesn't seem to understand gold. We don't say this...
  • SheltonThe Devil You Know - or the One You Don’t?
      Better the Devil You Know? We are providing around-the-clock nursing care to our invalid wife, who is back at home, with cracked ribs, unable to move. We are upstairs in the bedroom – the shutters closed against the heat (we have no air-conditioning) – taking a few minutes to update our Diary... but with nothing important to say.   Every day, we look at the headlines, think about what is going on in the big wide world and try to connect a dot or two. It is probably the...
  • tapis tilesFarming in France Is No Picnic
      Introductory Remarks by PT: At first we actually didn't want to post this particular Diary entry, because we felt it was too “off topic” (although we do of course occasionally discuss off topic issues), but upon further reflection it struck us that it is actually quite interesting when considered in a broader context.   EU spending: most of the budget is spent on subsidizing agriculture (which represents less than 2% of total economic output). As is the case with all...
  • South DeepThe Myth of Leverage
      Mining Stocks, Gold Prices and Commodity Price Trends Gold has gone up >400% over the last 16 years. Ironically, it is hard to find a gold mining equity exhibiting similar performance. In retrospect, if one invested in gold, one not only made much better returns, one also took a relatively insignificant risk in comparison to owning equities—equities can go to zero while it is hard for a commodity to fall much below its cost of production. Moreover, depending on the jurisdiction,...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com