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! We are happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.

   

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:

  • LA5H5981sc
President George W. Bush presents the Presidential Medal of Freedom to Federal Reserve Chairman Alan Greenspan, one of 14 recipients of the 2005 Presidential Medal of Freedom, awarded Wednesday, Nov. 9, 2005 in the East Room of the Whiite House.  White House photo by Shealah CraigheadAlan “Bubbles” Greenspan Returns to Gold
      Faking It   Under a gold standard, the amount of credit that an economy can support is determined by the economy’s tangible assets, since every credit instrument is ultimately a claim on some tangible asset. […] The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. — Alan Greenspan, 1961   He was in it for the power and the glory... Alan Greenspan gets presidential bling...
  • William SimonEnd of an Era: The Rise and Fall of the Petrodollar System
      The Transition   “The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or euros. The sooner the better.” Ron Paul   A new oil pipeline is built in the Saudi desert... this one is apparently destined for the Ghawar oil field, one of the oldest fields in Saudi Arabia...
  • Vote Early Zombie at Sharpstown High SchoolWriting on the Wall
      Time to Sell... Maybe BALTIMORE – Yesterday, the S&P 500 hit a new all-time high. And the Dow just hit a new record close as well. If you haven’t sold yet, dear reader, this may be one of the best times ever to do so.   It's still flying... sorta. Meet Bill Bonner's tattered crash flag Image credit: fmh   We welcome new readers with a simple insight: Markets are contrary, pernicious, and downright untrustworthy. Just when the mob begins to bawl most loudly...
  • robot tradersA Fully Automated Stock Market Blow-Off?
      Anecdotal Skepticism vs. Actual Data About one month ago we read that risk parity and volatility targeting funds had record exposure to US equities. It seems unlikely that this has changed – what is likely though is that the exposure of CTAs has in the meantime increased as well, as the recent breakout in the SPX and the Dow Jones Industrial Average to new highs should be delivering the required technical signals.  The bots keep buying... Illustration via...
  • Toscana_Siena3_tango7174The Central Planning Virus Mutates
      Chopper Pilot Descends on Nippon Readers are probably aware of recent events in Japan, the global laboratory for interventionist experiments. The theories of assorted fiscal and monetary cranks have been implemented in spades for more than a quarter of a century in the country, to appropriately catastrophic effect. Amid stubbornly stagnating economic output, Japan has amassed a debt pile so vast since the bursting of its 1980s asset bubble, it beggars the imagination.   A...
  • tokyo whaleDestination Mars
      Asset Price Levitation One of the more preposterous deeds of modern central banking involves creating digital monetary credits from nothing and then using the faux money to purchase stocks.  If you’re unfamiliar with this erudite form of monetary policy this may sound rather fantastical.  But, in certain economies, this is now standard operating procedure.   The “Tokyo Whale” Haruhiko Kuroda explains his asset purchase madness with a few neat little slides. Photo credit:...
  • The-Deep-State-Mike-LofgrenAmerica Has Become a “Parasitocracy”
      Dread and Denial So, let’s return to the discussion you can’t have with your congressman, your mailman, or your barmaid. It’s the important one. It concerns what the Fed is really up to.   Eight years after achieving independence, a State modeled after the British merchant state was established in the US. It took a while for the Deep State to consolidate itself within it, a process that was accelerated greatly in the run-up to and aftermath of WW I. Illustration by Ana...
  • London-City-Scene lo rezFat People for Trump!
      Alphas and Epsilons BALTIMORE – One of the delights of being an American is that it is so easy to feel superior to your fellow countrymen. All you have to do is stand up straight and smile. Or if you really need an ego boost, just go to a local supermarket. Better yet, go to a supermarket with a Trump poster in the parking lot.   The protest vote attractor with the funny hair. Image credit: Liberty Maniacs   Trigger warning: In the following ramble, we make fun of...
  • bristlecone-1000x672Long Term Market Perspectives
      Methuselah Tree When looking for a good theme for this post I pondered for a while and then decided to use a picture of a bristlecone pine, which are widely considered to be the oldest living trees in the world.   Ye olde bristlecone Photo credit: Kosta Konstantinidis   You can find them near the Nevada/California border and if you wind up traveling in the area then I strongly recommend that head over to Bishop and from there head up high up into the White...
  • Juncker, Keqiang, Tusk 2EU Sends Obsolete Industries Mission to China
      “Tough Negotiations” The European press informs us that a delegation of EU Commission minions, including Mr. JC Juncker (who according to a euphemistically worded description by one of his critics at the Commission “seems often befuddled and tired, not really quite present”)  and European Council president Donald Tusk, has made landfall in Beijing. Their mission was to berate prime minister Li Keqiang over alleged “steel dumping” by China and get him to cease and...
  • Purchasing Power of the BuckThe Real Reason the “Rich Get Richer”
      Time the Taskmaster DUBLIN – “Today’s money,” says economist George Gilder, “tries to cheat time. And you can’t do that.” It may not cheat time, but it cheats far easier marks – consumers, investors, and entrepreneurs.   Tempus fugit – every action humans undertake has to take time into account. In the economy, interest rates serve as the signal and regulator of the inter-temporal structure of capital. In an unhampered free market economy, they tell...
  • chart-4-silver-basis and cobasisGold is not Going to $10,000
      One Cannot Trade Based on the Endgame The prices of the  metals were down again this week, -$15 in gold and more substantially -$0.57 in silver. Stories continued to circulate this week, hitting even the mainstream media. Apparently gold is going to be priced at $10,000. Jump on the bandwagon now, while it’s still cheap and a bargain at a mere $1,322!   All aboard... or maybe not? It all depends on what one wants to achieve – there's many a slip 'twixt the cup and the...

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