[miningmx.com] — NOT for nothing did I draw the comparison last week between buying marginal South African gold shares and playing in a high-stakes poker game. No sooner had AngloGold Ashanti CEO Mark Cutifani and the respective “brains trusts’ at Thompson GFMS as well as JP Morgan Cazenove all called gold to levels above $2,000/oz than the wheels came off.
The gold price dropped just over $100/oz in the course of a few days.
The key issue for the South African gold companies is that the rand gold price has held up far better than dollar gold and remained above R400,000/kg thanks to the unexpected plunge in the value of the rand against the dollar.
The gold price had gone as high as R467 000/kg and, at the low of $1 549/oz, still amounted to R413,355/kg with the local currency sitting at R8.3/$.
The local gold companies will still make excellent profits at these levels. The reason for the rand’s sudden collapse from levels below R7/$ lie with the sovereign debt crises in Europe where banks have been forced to repatriate funds from emerging markets like South Africa to deal with liquidity crunches developing at home.
Despite this, the impact on SA gold share prices has been significant. Gold Fields traded as high as R145 – a level not seen since 2007 and 40% up on its 12-month low – before pulling back to around R129.
DRDGold had taken off from around 300c early in August to as high as 489c before plummeting back to just above 400c, but then bouncing almost immediately to 420c.
The reason for the volatility in the gold stocks, despite the fundamental underpin of the high rand gold price, again lies in the European sovereign debt crisis and the rising concern this could trigger a double-dip recession.
In a nutshell, investors are worried they could be looking at a replay of 2008/2009 when gold took a pounding – it dropped 30%, along with everything else, despite its much touted “safe haven’ characteristics.
As Martin Murenbeeld, chief economist for Canadian institution DundeeWealthEconomics, points out “recessions are not good for gold or much else other than treasuries and (Canadian) government bonds.’
What’s good for gold are the policies governments use to get economies out of recessions but that’s not happening yet in Europe. Murenbeeld adds: “There’s a lot of policy talk, but little policy action.
But in Europe little policy action risks something much more dangerous than a nasty recession. It risks multiple bank failures on the back of defaulting sovereigns. Bank failures, in turn, raise the spectre of a mini-depression.
“We continue to think that the most likely scenario going forward is that the policymakers will eventually have to reflate with monetary, fiscal and exchange rate policies. This will buoy gold prices because gold responds positively to reflationary policies.’
Murenbeeld sees a 20% probability to the required policies not being implemented, in which case “gold will then decline further in stages – as we saw in 2008 – until the European Central Bank and the Federal Reserve finally decide enough is enough’.
Jeffrey Nichols, MD of American Precious Metals Advisors, reckons the bullish fundamentals underpinning gold’s long-term price trend remain intact and the price is going higher.
– The article first appeared in Finweek. If you want to subscribe to the digital format of Finweek visit www.zinio.com.
