The Canary In The Gold Mine
Submitted by Pater Tenebrarum via Acting-Man.com,
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.

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.
Gold 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.
HMY, 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.
South 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.
GFI – 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.
Gold 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:
Gold 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:
HMY, 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, today's US payrolls data 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.
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Fuck, zombie canaries...
You gotta shoot them in the head....the HEAD!!
Cmon now with the canaries, haven't we establised that bull market for any commodity rises in terms of all curencies not just Argentine pesos or Zimbabwe dollars?!
and in the phyzz blast off in 2011, silver was way ahead of the game compared to gold as it tends to react quicker and at a greater percentage price-wise and with more volatility up and down compared to gold. Silver price peaked at the end of March 2011...it took gold until the end of July 2011 to peak and then begin it's lengthy downturn.
So, in keeping w/ the same theory as this article, if we start to see a similar blast off in silver sometime this year (or whenever) ahead of gold taking flight, then silver could be the other more significant canary in the coal mine that will tip us off that gold will be coming back to life soon after.
When the financial panic hits and the markets are shut, how will gold equities help you?
The people of Cyprus learned that anything in the financial system is of no use when the system is shut.
Being in gold equities are just a part of my investment portfolio.
My investment pyramid would look something like this....
On the top: gold equities, huge leverage when gold prices go up offering 1000% gains plus.
In the middle: Physical Au Ag Pt, My true savings/retirement. SHTF fund/long term investment.
On the bottom: Cash, weapons & ammo, food, skills (gardening, hunting, butchering, wine/beer making etc.)
Cyprus people invested in gold stocks were still able to sell them and/or collect dividends from them. So stop exxagerating. If the 'market's are shut down, the mines will still exist and will still be owned by their owners.
-
Canary: "Oh my god, when they said manipulation, I had no idea it would feel like this..."
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what a fucking farce...
http://www.kitco.com/charts/livesilver.html
http://www.kitco.com/charts/livegold.html
Farce2 occurs when they discover ISIS in South Africa.
You've got to stop watching the paper market price.
It is meaningless.
There is an accelerating run on physical gold and the run has been on for several years.
The paper price is real as long as someone delivers into it.
You can also fly by flapping your wings until you hit the ground.
Agree completely perfect pinto - the comex price and the physical price are worlds apart. Our physical price (trade) has been rising consistent past 3 years and while the comex drops the physical rearly follows to the same degree.
Our 5g bars are as competitive as anything out there
www.teamramgold.com/about-us
@ Kaiser,
You forgot the per verbal "Death To The Money Changers."
im too fucking pissed at the moment...
carry the baton if u wish....
A watched market never crashes. Get down to the LCS!
Kaiser,
Don't sweat those Scum Fuck Elite Lucerferian Psychopaths. Their day of Reckoning is fast approaching them & they now it. There won't be any safe haven for their escape.
They fear the masses as well they should.
Evidently KS has been playing at the casino...
What? Am I on?
"I'm ready for my close up Mr. DeMille"
Quiet you!
Not yet..
Didn't Obama say that last week?
Obama's the canary in the gold mine? Turn up the gas!
I TOLD you it was simply stunned!
It's alive!!
sure sure, about damn time, but is that paper or physical?
I've been on the sidelines a long time waiting to jump back on some mining stocks....I'm not jumping yet!
The game goes on.
I don't give a rat's ass about the paper price of gold. Gold will be manipulated until the very end, and if you don't own any when that time comes it will have been too late.
Agreed Dr.
"A Bird in the hand is worth two in the bush." If you don't own Physical PM's, you ain't got Shit.
I hope these companies all produce their energy requirements on site with generators. Because relying on South Africa's energy grid...
You got that right... Although for now I can tell you the power is staying on just fine... how long that will last, well... Oh the days when we had cheap/abundant power, our mines produced under the Gold Standard and we were the largest gold producer on earth. Those days the Rand was stronger than the Dollar and we were sinking the deepest shafts ever.
Fortunately our poor economic performance has reduced power demand, it's been much more of a help than the iffy increases in capacity.
Sigh... now we're just a small gold producer with intermittent power supply and lots of labour problems. We still do Platinum quite well but again, power and labour huge issues. I really wish we still operated under the gold standard, it would solve a lot of our financial leakage and thus economic/social problems if our banks could buy up gold directly from our miners instead of fiat forex.
Some of the miners are almost trading at cash. Look at giants like Silver Standard and Coeur Mining. Both sitting on $200,000+ in cash...just breaking even at today's prices but huge upside if silver/gold were to move even 20% higher.
https://miningstockvaluator.com/company/CDE/coeur-mining-inc
Damn Canary got run over by the Dollar.
Today's superficially strong jobs report is a great setup, because it provides no cover for the Fed to lower rates in order to placate the stock market. In other words, when the Fed finally abandons its rate hike campaign later this year in an effort to prop up stocks, it'll be (a) too little, too late, and (b) patently obvious to even the most casual Fed watcher that it has nothing to do with any of the metrics the Fed told us all along it was watching in the "data dependent" run-up to raising rates.
The embarrassment this reversal will cause the Fed will be precious. Even ardent Fed defenders will be chagrined.
Isn't a lot of this due to the decline in the exchange rate of the ZAR to other currencies?
http://www.bloomberg.com/quote/USDZAR:CUR
The Rand is getting destroyed, it is currently over 16 ZAR to the USD and rising fast.
The weakening currency does not really make a fantastic case for local gold producers. Although it does cheapen marginal miners' loans and improve earnings somewhat. I would say the poor value of the currency is not really a driving force here.
I think this probably has more to do with speculative buying on gold's uptick and international investor memory of South African gold stocks as some of the best in the world. At one point we were the world's largest gold producer, not so much anymore at all.
South Africa is extremely sensitive to foreign investment flows.
gold miners did the same thing last January, that was a head fake. These stocks will rally only when gold catches a bid. That's not going to happen until Yellen is forced back to ZIRP or NIRP or QE.
Actually, even that is not going move it much. This thing is completely 'captured'. Only when the Chinese lay theirs down and decide to call the hand, will we see fear sufficient enough to convince the bag-holders that something is indeed, terribly awry in U.S. markets. Not a moment sooner.
Addendum:
If U.S. foreign policy in Ukraine, Syria or the South China Sea decides to get 'frisky' with the Russians and/or Chinese to an extent that would provoke the 'nuclear option', the 'acceleration factor' for gold will be riding a hockey stick.
You are correct to suggest that there is a strong correlation between gold miners stocks and the gold price.
Gold's price drives those stocks first and foremost. Other traditional valuations a long way second, third etc.
My favorite stock is Twitter.
Supply and demand are barbaric relics.
My Grandfather always used to say to me "If you're going to buy a Gold Miner as an insurance policy against the world going to hell in a handbasket, make sure the mines are located on the other side od the earth in a country with an unstable political environment"
Good advice. Your grandfather was a smart man.
South Africa is around the world from pretty much any civilised place and it will always be politically unstable.
Feel free to invest here, we need it and your money will be safe in mining - no mine nationalisation confirmed by ANC.
I'm underwhelmed. Thanks for publishing.
and Silvers gains yesterday wiped out...
Well, of course. It goes on as long as someone can deliver at these prices.
they're still deciding which trendline or MA to monkey hammer it back down....stay tuned
The problem with getting really good at reading charts is you kind of forget how to read the signs.
The sign says, "Impending DOOM!!"
Every time there is a post on ZH involving South Africa and cast in a positive light, I get little hope boner.
It's exciting to think we're still relevant somehow and there is a silver lining to our woes.
If our miners could just recover, well, maybe that would hold off genocide and failed state a little longer.
Maybe just long enough for all the gold I've been buying to find it's way across the border into Namibia.
Exalt.
You are, in my eyes, very brave just to stay there.
Your power will run out soon, that will shut down the mines.
The storm is seemingly close now, for all. You and yours' , however, are in harms way far more than I.
For my 2p worth, collect it all together and get to an enclave; Oz, NZ are my 1st choices.
Best wishes,
Rocky