Money Talk - PDF

							Market Talk
ISSUE 2: October 2009

If you are not sure what the markets are doing... Don't worry, every week Greg gives a weekly market update.
Do you follow the “Yellow Brick Road”? I started on the JSE at the height of the 1980 Gold Boom and it was incredibly exciting. There was buzz about the JSE that I haven’t seen repeated. In those days there were more than 40 different gold shares listed on the JSE and if there was any market in the world in which to buy Gold Shares the JSE was it. Gold in those days was a huge component of the South African economy and was certainly the major part of the market cap of the JSE. Post the 1987 Gold shrank to be only about 6% of the make-up of the JSE. Since then the trend globally has been for consolidation in the Gold mining industry and this is clearly evident on the JSE where we have only 10 odd shares left with a listing and some of these are recent comebacks since gold has risen. It is nice to see Gold hitting the headlines again as it has risen to new all time highs at around the $1060.00 an ounce level. When we look back at the last gold boom, gold hit a high of $850.00 an ounce. What people don’t realise is the speed with which the price actually moved to that level once it got into its stride. So let’s look just briefly at what happened. In 1971 while the US was under severe financial strain President Nixon severed the link between Gold and the US Dollar. It used to say on a dollar note that: “I promise to pay the bearer in gold” This was changed to say: “In God we trust.” Currencies now floated and were valued as such against the dollar and not against Gold. Gold moved from $35.00 an ounce to $195.00 an ounce by the end of 1974. By the late seventies geopolitical factors such as the cold war the Russian invasion of Afghanistan and very weak dollar and rampant inflation saw the Gold price run up to trade up to $381.00 an ounce in November 1979. In just two months the price of Gold went from $380.00 to a record high of $850.00 an ounce. This shows just how fast this commodity can move and when it’s on the move there are great opportunities to make money.

History has again repeated itself and we have Afghanistan at the forefront of Global politics and once again the dollar is under huge pressure. With the record stimulus that we have seen pumped into the global economy there is a threat of inflation becoming rampant once more. This is something that the Gold Bulls are shouting about while central banks are adamant that they will react in time to stem inflationary pressures. The financial crisis has also highlighted the fear that investors have in being invested in single assets or currencies and Gold has benefitted from investors diversifying. Now once again we arrive at the point where commentators are talking more and more about gold and it is making headlines once more. This brings to the fore the question of: do we invest in Gold? I don’t purport to have the answer but let’s just look at a few aspects of investing in Gold and Gold shares. The three major players in the South African Market are: AngloGold Ashanti (share code: ANG); Goldfields Gold (share code: GFI) and Harmony Gold (share code: HAR). Then there are second liners or more marginal shares that are very speculative but when there is a fully fledged gold run they perform incredibly well. As a general rule one would look at Gold shares as a trading play because like we saw in history these moves can be very quick. There is also the play in the physical market where you can buy Krugerrand’s or alternatively there is an Exchange Traded Fund in gold listed on the JSE. Gold ETF (Share code on the JSE: GLD). This ETF can be bought on Share Builder and Share Investor. It is listed in Rand’s and tracks the Rand price of gold. It is directly correlated to the Rand price of gold. It is important to understand the huge influence that the Rand has on the ETF’s share price. Let’s track the price of the share against that of the Dollar gold price over the last few months. On the 10th of July 2009, gold was $910.00 an ounce, the Rand was R8.15 against the dollar and GLD the Gold ETF was at R73.60 Gold is currently at $1047.00 an ounce which is a move of 15%. The ETF GLD is at R75.75 which is only a 3% move. The Rand has strengthened to R7.35 a move of just over 9%. This illustrates the influence of the Rand. Looking at the prospects going forward you have to factor in the prospects of the Rand. Personally I think that the Rand will weaken but it is a currency that continues to confound the pundits. Shares: This is the traditional stock market investment vehicle for Gold. Gold mines have varying cost of production and the higher the costs the more geared they are to the Gold price. The best way to explain gearing is for you to imagine a bicycle or a watch where a small cog drives a big cog. In much the same way gearing is a small amount of cash that is geared can deliver a bigger profit. Once the Gold prices gets moving the mines that are higher geared really start to deliver bigger returns. Remember though bigger returns are usually accompanied by bigger risk. As a general comment on our Gold shares, Anglo Gold is the lowest cost producer and is somewhat cushioned to the negative impact of the Rand because it has more operations outside of South Africa than the other local shares. Goldfields is also a quality operation while Harmony is more marginal. Away from these they are very marginal and very speculative. Analyst’s feelings are that South African Gold shares are fully priced at current levels. Remember however that the main buyers of South African Gold shares are the traditional American Gold bulls and when they start buying they buy the hype just as much as the valuations so normal research of Gold shares is very hard and certainly not an exact science.

There is a comment that I first heard back in the eighties which you may do well to remember - “Gold shares are not for widow’s orphans or pensioners.” They are risky. Outlook: I am still optimistic about the prospects for the Gold price. There are still lots of factors that are in its favour. Most investment gurus will maintain that you should have between 5% and 10% of your portfolio in Gold. Gold will continue to benefit from dollar weakness and a general lack of confidence in currencies. Risk aversion has also seen more demand for Gold. China needs to diversify away from the dollar and has been adding to its reserves. The Gold market is rather small and it wouldn’t take much investment from the likes of China to move the price significantly higher. Demand out of India remains very robust and when the global economic climate improves demand for Jewellery will pick up once more. Investment demand has picked up significantly. When considering the Rand it is my belief and that of most analysts that the Rand will devalue over time and so Gold Shares do offer some kind of hedge. Lastly if you took the Gold price at its 1980 highs of $850.00 an ounce and extrapolate that out with inflation it would be trading at $2400.00 an ounce. A walk down the “yellow brick road” can be quite rewarding. Once again let me leave you with another investing rule: When you're not sure, stand aside - it is ok to be in cash and not in the market Till next week Cheers and invest well, Greg Volkwyn

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