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IS GOLD SET TO SHINE?
Sanlam Private Wealth
Jul 20, 2021
Gold prices suffered the biggest monthly drop in four-and-a-half years in June 2021 after the US Federal Reserve surprised investors with its willingness to control inflationary pressures with an eventual rise in interest rates, denting the appeal of holding the metal.
Gold fell 7% in June to US$1 779 an ounce, which still left the price within its range for the year so far, but was the worst monthly drop since November 2016. Shares in gold miners have also sunk 16% this month, according to the NYSE Arca Gold Bugs Index.
Gold has struggled against a stronger US dollar and rising bond yields following remarks by Fed officials last month that indicated an increased likelihood of interest rate rises in 2023. Gold suffers when bond yields rise, because the metal provides no yield to investors.
There has been a marked change since the comments by Fed officials – a relentless rally in US Treasuries has accompanied the biggest burst of inflation in more than a decade, snapping typically reliable patterns and leaving investors scrambling for an explanation for what’s going on in the world’s largest bond market.
Inflation is typically bad news for bond prices, eroding the value of the fixed payments the debt offers and making it more likely that central banks will respond with interest rate rises. However, in recent months, this relationship has been turned on its head, at least for longer-dated debt. US Treasury prices have run up big gains — with bonds around the world following in their wake — pulling the 10-year yield to its lowest in more than three months this week at just under 1.3%, down from 1.75% at the end of March.
Inflation has emerged as a primary concern for investors. On balance, arguments for ‘uncomfortably high’ US inflation seem to outnumber those against it, at least in the near term. A natural consequence of such risk is for investors to seek protection against it. Gold is a proven long-term hedge against inflation but its performance over the short term is less convincing. Despite this, our analysis shows that gold can be a valuable component of an inflation-hedging basket.
Gold also protects purchasing power over the long run against more than just the price of goods and services. In tracking money supply, gold can help investors protect against potentially excessive asset price inflation and currency debasement.
Inflation has supplanted the global pandemic as a primary risk for investors. However, the jury is still out over whether this inflationary episode will fully materialise, and whether it is transient or pervasive. If it does turn out to be more than just a short-lived event, an inflation-protected portfolio should include gold for the benefits it brings.
Our preferred pick in the sector is AngloGold Ashanti – the world’s No 3 bullion miner has recently made a non-binding proposal to Corvus Gold to buy the remaining 80.5% of the company it does not own.
Over the past 12 months, AngloGold Ashanti is down 45%. Over the past five trading days, the stock is up 4.18% and over the past three months, it has risen by 8.95%. Over the past 30 days the Relative Strength Index (RSI) is at 46. It is testing the middle of the Bollinger Bank, which sits at R275. The 10-day volatility is low at 21.68. Compared to others in the industry, AngloGold's numbers are as follows:
Source: Sanlam Private Wealth research
AngloGold reported a decent operational set of results under difficult circumstances, with the company largely delivering on the variables within its control (costs and COVID-19 revised production guidance). Last week, the miner announced plans to pay R5.4 billion cash to buy Corvus Gold and extend its exploration footprint in Nevada in the US.
AngloGold, whose new CEO, Alberto Calderon, will start in September, has now left its historical home in South Africa behind to focus on its international operations. In the latest development, AngloGold, still under the leadership of interim CEO Christine Ramon, has made a non-binding proposal to Corvus to buy the remaining 80.5% of the Canada-based company it does not own. Ramon will return to her previous job as CFO in September this year.
Corvus has exploration assets in southern Nevada, close to or neighbouring AngloGold’s three exploration assets there: Silicon, Transvaal and Rhyolite. It’s unusual for large mining companies to buy assets that are still in the exploration phase – a highly risky part of the resources business which consumes a lot of money for potentially little return. It takes years to build a mine, so investors tend to wait a long time to see returns.
With this latest move, AngloGold is clearly indicating that it sees potential in Corvus as it cements its position as a major international gold miner.
AngloGold Ashanti Limited (AngloGold Ashanti) is a gold mining company. The company’s business activities span the spectrum of the mining value chain, its main product being gold. Its portfolio includes mines in around 10 countries, and it also produces silver and sulphuric acid as by-products.
The company operates through three segments: continental Africa, Australia and the Americas. Its continental African operations include those in the Democratic Republic of the Congo, Ghana, Guinea, Mali and Tanzania. The Australia segment comprises Sunrise Dam and Tropicana, while the Americas segment includes operations in Argentina, Brazil and Colombia.
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