GOLD ANALYSIS

Gold investors still preferring to wait on the sidelines

Given the current economic climate, investors are holding out for the quarterly numbers to come out before pinning their colours to the equity rerating mast.

Author: Christy Filen
Posted: Tuesday , 25 Oct 2011

JOHANNESBURG - 

Here in South Africa, quarterly gold results are due from Harmony and DRD Gold in the next week but, in the current economic climate, investors and analysts remain cautious. And, the apparent disconnect between the bullion price, profit margins and the gold equity prices is symptomatic of this.

Whilst the US dollar/oz gold price has increased 185% over the last five years, Harmony's share price over a similar period has decreased by 24%. Even more severely affected, DRD Gold has decreased by 60% over a comparative period. These moves are readily explained by declining grades, corporate restructuring, the difficulty with cost containment and the safety risk attached to the removal of the ore.

Investors have become more risk averse and prefer what some analysts deny is the safe haven status of gold. The ease with which investors can now trade in the underlying metal via exchange traded funds has also contributed to stronger flows not to mention the gold ATM's springing up in China, and Dubai, among other places.

Looking at the movements over the past year, the yellow metal has increased by 16.7% and Harmony's share price by a similar number (17%) showing a return to correlation once again but the long term gap persists.

An analyst who preferred not to be named, is wary of gold equities preferring the "wait and see" game, to confirm if the higher bullion price will flow through to the bottom line. With the global uncertainty weighing heavily only the delivery of solid results by the miners along with an upswing in global investor sentiment is likely to spur any positive share price movement. The logical question being asked is, how much the higher inflationary environment we find ourselves in has eroded the flow through of the high metal price.

Imaru Casanova, a managing director at boutique investment bank, McNicoll Lewis & Vlak's New York office told Mineweb "overall markets are depressed and there is a lack of belief in margins."

Imaru says that gold companies in the past have not paid high dividends and some have disappointed investors by not realizing margins as high as the strong gold price may suggest, due to increasing costs.

She went on to say that this could be an opportunity for investors, with a long term horizon, to look at acquiring equities as the gold price has shown strong support at current levels and combined with economic stability and less market volatility, gold prices could climb again with the relevant equities expected to follow suit.    

AngloGold's outlook in its latest six monthly report states that "...the ongoing sovereign solvency turmoil in Europe should underpin the gold price going forward. Despite the modest 4.5% increase in the average gold price in the quarter under review, the increase marks the 10th consecutive quarter of growth and represents gold's longest winning streak since the 1920s."

The company's Chief Executive Mark Cutifani has also recently been quoted in media reports saying that he sees no bubble in gold prices at current levels and says that prices could easily go higher amid global economic uncertainty.

The analysts tend to agree. Tom Kendall, the vice president for commodities research at Credit Suisse, is of the opinion that gold will trade higher over the balance of this year. He expects, sooner or later, to break out of the $1600 - $1700 range and through into next year he foresees a push above the high of around $1920 that we saw earlier this year, and thinks that gold will, without a doubt,  trade up above $2000 next year.

If this turns out to be the case, nothing short of spectacular results announcements from the miners is likely to facilitate a catch up.