With the gold price at current lows, the age-old debate on whether to hold or trade gold shares is resurfacing. Although the trend internationally is for portfolio managers to trade all securities, in South Africa “investors tend to invest in gold shares instead of selling them like any other commodity,” says a gold analyst.
“Gold shares are all linked to the big boys and they are likely to support the marginal mines during bearish trends,” he says. The general tendency in South Africa is to advise clients to buy gold stocks and lock them away for the future “because gold is a scarce commodity”.
Says another analyst: “Look at Kloof gold mine, which saw its share price drop to 3 800 cents from 5 750 cents in September last year after the mining disaster. The price is now standing at over 6 000 cents.” He believes that “everything points to a commodity cycle improvement in the near term and this should spill over into the precious metals market”.
Yet numerous analysts say the South African market is perfect for trading gold stocks. In fact, some believe that investors have no option but to buy and sell “quickly and without delay”. This is especially so if the effects of inflation are taken into account.
A look at the indices shows that the All Gold Index reached an all-time high just before the 1987 crash, when it registered a level of 2 500 points. It fell to about 2 200 after the crash and has remained at these levels since, currently standing at 2 157.
In an analysis of the local gold market, US-based securities firm Innova Securities agrees that gold shares should be regarded as a trading and not as an investment stock.
“The diversity of the market in terms of margin, reserves and management makes it a perfect battleground for traders,” says Innova in its Market Insight issue number 03. It adds that “SA’s gold stocks are substantially more tradeable than the rest of SA shares”.
Other international gold analysts agree with Innova, stating that ultimately the commercial and financial rand will merge. When this happens, they say, South African gold mining shares will be in great demand. They argue that the abolition of the finrand will cause the commercial rand to devalue and that this will have a negative effect on SA Industrials. Gold shares are, on the other hand, traded in US dollars, which means the rand price of gold will increase.
Innova forecasts an increase in the gold price by as much as 10 percent, which should cause at least a 54 percent increase in Randfontein’s price, 59 percent in Freegold and 79 percent in Harmony’s price. High margin mines, like Driefontein, are not expected to see significant price increases.
Diverse opinion on the subject is not new. While some say that investors should trade gold shares, others will simply not have anything to do with such stocks.
Advice ranges from “it’s easy to judge the cycle correctly and make bonanza profits,” to “mines have limited lifespan and can’t be long-term investments”.