South African Gold Stocks Surge

Late last year we discussed one of the world’s most marginal mid-sized gold mining companies, South Africa-based Harmony Gold (HMY) (see “Marginal Gold Producer Takes Off” for details). We did so for two reasons: first of all, the stock has a well-established seasonal pattern – it tends to rally strongly from roughly November/December to January/February.

 

CanaryPhoto via hdwallpapersbin.com

 

Secondly, this pattern is not merely a statistical artifact, but it actually supported by a clearly discernible fundamental driver – namely, this is the quarter during which the group traditionally posts the strongest results of the year. Thirdly, recent fundamental improvements (stronger than expected earnings and guidance) and a breakout in the Rand gold price to new highs seemed especially supportive this year.

 

1-Gold-in-Rand-AGold in Rand, weekly. This is a rather bullish looking chart at this stage – click to enlarge.

 

At the time we wrote in conclusion that we wouldn’t recommend chasing the stock, because it had become short term overbought (it did in fact pull back shortly thereafter). However, we also noted that we personally believed that the rally was likely to continue.

This has in fact happened – and in the meantime, other South African gold stocks have likewise begun to move noticeably higher. In other words, the market is apparently not only reversing last year’s tax loss selling effects to some extent, it is also beginning to recognize the potential for sharp improvements in the earnings and cash flows of these companies. Most South African mines are fairly marginal, so even a relatively small rise in the gold price can have a big effect on their net income.

 

2-HMYHMY, daily – needless to say, we wouldn’t chase the stock here either, as it is once again quite overbought. However, it is worth keeping in mind that this stock traded at more than $15 at the 2011 USD gold price peak, at which time the company was operationally in worse shape than today – click to enlarge.

 

Another stock in this sub-sector that has managed to break out from a bottoming formation recently is gold tailings processor DRD. This is not really a mining company in the traditional sense, but it does produce gold quite profitably and has increased its year-end dividend five-fold last year – making it one of the highest-yielding gold stocks.

 

3-DRDSouth African gold tailings processor DRD – this one is also overbought in the short term, but is surely worth watching – a successful retest of the breakout would be an invitation, so to speak – click to enlarge.

 

A third stock we want to briefly look at is Goldfields (GFI), which is no longer strictly a South African mining company, as it has spun the bulk of its SA assets out into a separate entity, Sibanye Gold (SBGL). SBGL is a special case, as its stock has bottomed back in the summer of 2013 already. The reason why GFI is still worth grouping with the other SA miners is its mechanized South Deep mine, which will eventually produce up to 700,000 oz. per year (if everything goes according to plan that is. It is currently still far from that, but production has begun to pick up. The mine’s gold resource is easily one of the biggest in the world).

 

GFI moreover has assets in Ghana, Peru and Australia and benefits from weak currencies in all of these countries. Contrary to the “SA pure plays”, it hasn’t broken out just yet, but seems to be in the process of doing so (as a result it is also less strongly overbought). It is also worth noting that GFI’s management made the mistake of hedging oil prices just as crude oil was about to tank in late 2014 – these hedges are now running off, so the benefits of lower oil prices should begin to flow through to its bottom line. It also stands to reason that the recent improvements at South Deep are probably not a fluke: the company is implementing brand-new mining methods and employing new technologies, which seems to be working quite well.

 

4-GFIGFI – in November the company surprised the market by reporting a much better than expected quarter – click to enlarge.

 

As the title of this post already indicates, we are actually trying to get at a specific point here. In other words, we are not necessarily just beating the table for SA gold stocks; after all, positive currency effects are enjoyed by many producers at present. The market appears only slow in recognizing this fact (several Australian producers did get a currency-related boost last year).

 

Gold Prices and Leading Sub-Sectors

As to the gold price, late last year we have chronicled assorted technical smoke signals, as well as sentiment and positioning extremes in great detail, so this ground doesn’t need to be covered all over again so soon. Obviously, gold has recently turned up even in USD terms, and in the process has overcome an initial technical resistance level.

We generally don’t like it when gold rises for all sorts of supposed “reasons”, especially not when some of them concern geopolitical developments, but we can’t fault the advance from a technical perspective. Besides, the reasoning presented in the media seems spurious anyway. In reality, the most widespread assumption up until very recently has been that gold would fall because the Fed has begun hiking rates.

As our regular readers know, we have disputed this assumption for well over a year now. In our opinion it was mainly the threat of rate hikes that weighed on the gold price. It seemed logical that the actual implementation of rate hikes would be greeted with a relief rally. Lastly, when everyone is sitting on the same side of the boat, the boat is usually bound to capsize.

 

5-Gold in USDGold in USD, daily. So far the rally is still small, but gold has overcome the upper boundary of the most recent trading range. A great many speculative shorts have been added at prices below $1,100 – this provides a lot of potential short covering fuel – click to enlarge.

 

Here is a close-up of the action over the past week:

 

6-gold in nUSD close-upGold over the past week, 30 minute candles – click to enlarge.

 

The recent break-out in the Rand gold price and the action in South African gold stocks reminded us of the rally out of the low in 2000. We remembered that the SA miners were one of the leading groups at the time as well, similarly driven by a surge in the Rand gold price due to a sharp decline in the Rand.

So we took a closer look at what actually happened in the time period and found out something quite interesting. Between late 2000 and mid 2002, i.e., a period of roughly 18 months, SA gold stocks indeed moved up quite a bit. However, what is most interesting is how they behaved relative to the Rand gold price.

The chart below shows an overlay of the prices of HMY, DRD and GFI (which moved largely in concert at the time) as well as the Rand gold price from October 2000 to October 2002. Pay close attention to the leads and lags:

 

7-SA gold stocks vs Rand 2000-2002HMY, DRD and GFI in late 2000 – late 2002 compared to the Rand gold price (lower half of the chart). The red vertical line aligns with the peak in the Rand gold price at the time – click to enlarge.

 

The likely cause of this lag in stock prices vs. the gold price relevant for the underlying companies was that just as the Rand gold price peaked, the USD gold price really got going, while the Rand concurrently strengthened. As a result, the SA companies were able to maintain the higher margins resulting from the earlier Rand gold price rally, while the currency in which their stocks are priced began to improve.

At the same time, traders finally began to believe that the upturn in the gold price was for real, so market psychology changed significantly as well. A previously relatively hesitant upturn became far more vigorous as more and more investors suddenly piled in for fear of missing the advance. Not to forget, the rest of the stock market suffered a vicious downturn during this time as well – gold stocks were a great sector to rotate into because they were one of the few really cheap and beaten down sectors (a potentially significant similarity to today).

 

Conclusion

While one can never be entirely certain about these things, as they always play out slightly differently, it could well be that the upturn in the Rand gold price and SA gold shares is once again a leading signal for the entire sector. The canary in the gold mine so to speak, only this canary isn’t dying: instead it is a dead canary that is coming back to life.

As a final remark, the upcoming US payrolls data on Friday could well precipitate a correction, given that gold has been rising ahead of the release. If the gold price manages to withstand the data (especially if they are strong), we would rate it as an especially positive sign, but a correction certainly wouldn’t surprise us after the recent run-up. We would like to see the $1,080 level holding firm on a pullback.

 

Charts by: StockCharts, BarChart

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • How to Survive the Winter
      A Flawless Flock of Scoundrels One of the fringe benefits of living in a country that’s in dire need of a political, financial, and cultural reset, is the twisted amusement that comes with bearing witness to its unraveling.  Day by day we’re greeted with escalating madness.  Indeed, the great fiasco must be taken lightly, so as not to be demoralized by its enormity.   Symphony grotesque in Washington [PT]   Of particular note is the present cast of characters. ...
  • Credit Spreads: The Coming Resurrection of Polly
      Suspicion isn't Merely Asleep – It is in a Coma (or Dead) There is an old Monty Python skit about a parrot whose lack of movement and refusal to respond to prodding leads to an intense debate over what state it is in. Is it just sleeping, as the proprietor of the shop that sold it insists? A very tired parrot taking a really deep rest? Or is it actually dead, as the customer who bought it asserts, offering the fact that it was nailed to its perch as prima facie evidence that what...
  • The Strange Behavior of Gold Investors from Monday to Thursday
      Known and Unknown Anomalies Readers are undoubtedly aware of one or another stock market anomaly, such as e.g. the frequently observed weakness in stock markets in the summer months, which the well-known saying “sell in May and go away” refers to. Apart from such widely known anomalies, there are many others though, which most investors have never heard of. These anomalies can be particularly interesting and profitable for investors – and there are several in the precious metals...
  • Business Cycles and Inflation – Part I
      Incrementum Advisory Board Meeting Q4 2017 -  Special Guest Ben Hunt, Author and Editor of Epsilon Theory The quarterly meeting of the Incrementum Fund's Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is...
  • What President Trump and the West Can Learn from China
      Expensive Politics Instead of a demonstration of its overwhelming military might intended to intimidate tiny North Korea and pressure China to lean on its defiant communist neighbor, President Trump and the West should try to learn a few things from China.   President Trump meets President Xi. The POTUS reportedly had a very good time in China. [PT] Photo credit: AP   The President’s trip to the Far East came on the heels of the completion of China’s...
  • Business Cycles and Inflation, Part II
      Early Warning Signals in a Fragile System [ed note: here is Part 1; if you have missed it, best go there and start reading from the beginning] We recently received the following charts via email with a query whether they should worry stock market investors. They show two short term interest rates, namely the 2-year t-note yield and 3 month t-bill discount rate. Evidently the moves in short term rates over the past ~18 - 24 months were quite large, even if their absolute levels remain...
  • Is Fed Chair Nominee Jay Powell, Count Dracula?
      A Date with Dracula The gray hue of dawn quickly slipped to a bright clear sky as we set out last Saturday morning.  The season’s autumn tinge abounded around us as the distant mountain peaks, and their mighty rifts, grew closer.  The nighttime chill stubbornly lingered in the crisp air.   “Who lives in yonder castle?” Harker asked. “Pardon, Sire?” Up front in the driver's seat it was evidently hard to understand what was said over the racket made by the team of...
  • A Different Powelling - Precious Metals Supply and Demand Report
      New Chief Monetary Bureaucrat Goes from Good to Bad for Silver The prices of the metals ended all but unchanged last week, though they hit spike highs on Thursday. Particularly silver his $17.24 before falling back 43 cents, to close at $16.82.   Never drop silver carelessly, since it might land on your toes. If you are at loggerheads with gravity for some reason, only try to handle smaller-sized bars than the ones depicted above. The snapshot to the right shows the governor...
  • Heat Death of the Economic Universe
      Big Crunch or Big Chill Physicists say that the universe is expanding. However, they hotly debate (OK, pun intended as a foreshadowing device) if the rate of expansion is sufficient to overcome gravity—called escape velocity. It may seem like an arcane topic, but the consequences are dire either way.   OT – a little cosmology excursion from your editor: Observations so far suggest that the expansion of the universe is indeed accelerating – the “big crunch”, in...
  • Claudio Grass Interviews Mark Thornton
      Introduction Mark Thornton of the Mises Institute and our good friend Claudio Grass recently discussed a number of key issues, sharing their perspectives on important economic and geopolitical developments that are currently on the minds of many US and European citizens. A video of the interview can be found at the end of this post. Claudio provided us with a written summary of the interview which we present below – we have added a few remarks in brackets (we strongly recommend...
  • Inflation and Gold - Precious Metals Supply and Demand
      Reasons to Buy Gold The price of gold went up $19, and the price of silver 42 cents. The price action occurred on Monday, Wednesday and Friday though so far, only the first two price jumps reversed. We promise to take a look at the intraday action on Friday.   File under “reasons to buy gold”: A famous photograph by Henri Cartier-Bresson of a rather unruly queue in front of a bank in Shanghai in 1949 in the final days of Kuomintang rule. When it dawned on people that the...
  • Precious Metals Supply and Demand
      A Different Vantage Point The prices of the metals were up slightly this week. But in between, there was some exciting price action. Monday morning (as reckoned in Arizona), the prices of the metals spiked up, taking silver from under $16.90 to over $17.25. Then, in a series of waves, the price came back down to within pennies of last Friday’s close. The biggest occurred on Friday.   Silver ended slightly up on the week after a somewhat bigger rally was rudely interrupted...

Support Acting Man

Top10BestPro
j9TJzzN

Austrian Theory and Investment

Archive

350x200

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

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]

 

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com