It will not have gone un-noticed by most Clients that, in recent months, there has been much media coverage surrounding gold and gold shares. You will also have noticed that BURLEIGH Investment Management has not in recent years advocated investments in gold shares. Whilst it is true that some Clients DO hold gold shares, the levels of these holdings are, in the main, at very modest levels

in relation to overall equity holdings.

BURLEIGH Investment Management has tended to take a more conservative view on resources and most Clients will hold an indirect interest in gold through, for example, an interest in Anglo American plc and / or in BHP Billiton. Some portfolios may have further interests in other resources, for example in Platinum through either Impala Plats or in Anglo American Platinum (Amplats), or even in Oil through Sasol.

 

BURLEIGH Investment Management has long held the view that investments in gold shares should be considered, at best, to be speculative. And, until recently, this view has been correct, and there has not been anything meaningful to be had from large holdings in gold. So, what is the position now ? Should all portfolios be changed to enlarge the position as it regards investments in gold? Where is gold headed ?

Why is the price of gold rising? Can it rise further ?

 

Let us examine the fundamentals. How has the US$ gold price, the Rand gold price and the JSE Gold index performed over the past years ?

 

Recent Performance of Gold and other Indicators - 1997 to 2006 :
	Gold	Gold	Rand /	JSE	JSE	Impala	Standard		BHP
	Price	Price	US$ Exch	Gold	All Share	Plats	Bank	Sasol	Billiton
	US$/Oz	Rand/Oz	Rate	Index	Index
12/97-1/98	297	1430	4.85	840	6073	4450	2120	4980	1235
3/1998	291	1445	4.97	679	7179	5450	2860	3880	1360
8/1999	256	1570	6.21	936	7143	19400	2050	4980	2850
2/2001	255	2015	7.89	882	9272	41500	3185	5830	3450
12/2001	279	3540	13.53	1881	10391	54700	2900	10020	5980
5/2002	308	3208	10.22	3219	11505	69800	3590	11900	5845
6/2002	321	3118	9.7	2315	11082	57000	3500	11350	5400
7/2004	392	2412	6.14	1642	10053	49600	4290	10375	5580
1/2006	540	3300	6.1	2600	18600	96000	8200	22100	10430
% Change :
1997-2006	82%	130%	-26%	210%	206%	2057%	287%	343%	745%
5/02 to 1/06	75%	3%	40%	-19%	62%	38%	128%	86%	78%
1996-2006	+ 36%	+ 114%	- 58%	+ 50%	+ 174%	+ 1296%	+ 402%	+ 571%	+ 491%

 

 

As can be seen in the above table, the RAND Gold Price (that is the selling price of gold which the local gold mines actually get to put into the BANK), is very dependant on the Rand/US$ exchange rate. This, in turn, has a very direct

bearing on the JSE Gold Share Index.  Therefore, whilst the US$ gold price (per ounce) has gained 75% from May 2002 to date, the corresponding Rand gold price has only gained 3% and IN THE SAME PERIOD, the JSE Gold Share Index has DECLINED by 19%. Gold shares have only really performed in the past few months where we have had a 45% gain since July 2005.  It is interesting to note that the much more steady ALL SHARE INDEX has out- performed gold in the long term and the four examples of non-gold shares shown (Impala Plats; Standard Bank; Sasol and BHP Billiton) have all far out-performed gold.

 

 

 

The JSE ALL SHARE Index (top) VS. the JSE GOLD SHARE Index (lower graph) over TEN years.

During this TEN year period, the All Share index has gained 174% whilst the Gold Share index gained only 50%. The graph also clearly illustrates the more STEADY All Share index performance against the VOLATILITY of the Gold Shares.                                         (Graphs by courtesy : Share Trader)

-------------------------------------------------------------------------------------------------------------------------------------------------

 

Although there is renewed international interest in gold at present, especially from Asia (and particularly China, who are seeking to boost their gold reserves), this does not necessarily mean a bonanza for S.A. Gold Mines. Locally, only a much weaker Rand / US$ exchange rate will be of REAL benefit to our mines. And, for the moment, it would appear that the Rand is remaining fairly stable against the US Dollar. Another negative factor, locally, is one of cost. S.A. Gold mines are, for the most part, very deep level mines, which are expensive to exploit. Our labour costs are always under pressure from the local trade unions, whilst labour itself is comparatively unproductive as compared to the workers in other gold producing countries - particularly the USA, Canada and Australia.

 

So, whilst the US$ price of gold is very high at present (±US$550), and by all accounts could go even higher - some figures being bandied about** are for a gold price as high as between $600 and $700 - this does not mean that S.A. gold mining companies will suddenly become very profitable. Yes, the gold share prices WILL rise on the positive (and speculative) sentiment which exists at present. But it is only controlled labour costs and a much weaker Rand which will put money in the bank (and dividends in your pockets) in the long term.

 

(** In a TV interview late last week, the "forever bullish on Gold" analyst, Clive Roffey, was of the opinion that 2006 would see the US$ gold price rise to levels of between $600 and $700.)

 

The stock market, in the long term, always looks for the production of EARNINGS (Profits) and INCOME (Dividends) from companies. Unless local Gold Mining companies are able to control labour costs, with commensurate productivity, combined with a much weaker Rand, then these profits will not, in the long term, be forthcoming. The result of this will be that the market will RE-RATE the value of high priced gold shares down to LOWER levels. This has happened in the past, and it is very likely that it will happen again. Basically, present high priced gold shares

are on completely unsustainable P/E ratios, for example, Anglo-Gold is on a P/E ratio of 160 and Goldfields on an even higher P/E of 260. These are extremely HIGH P/E ratios, bearing in mind that the JSE average P/E ratio is only 16. By comparison, the two best platinum companies, Implats and Angloplats have P/E ratios of 22 and 33 respectively - much more manageable levels than those of the gold mining companies.

 

It is the view of BURLEIGH Investment Management that gold shares are speculative investments in the long term and that they should, at best, be considered only as vehicles for short or medium term TRADING, and then, generally only by experts. For most Clients, Platinum shares will be, in the long term, a much more profitable investment. And for those who wish to sleep peacefully at night, the more diversified general mining resources companies like Anglo American plc or BHP Billiton (which both DO own some gold interests) would be much 

safer,  more conservative investments.

 

However, IF any BURLEIGH Investment Management Client really does want to invest in gold shares, available on the J.S.E., then which gold shares should they look to ?  Because there are so many factors in the life of a gold mine, it is very difficult to make a precise analysis of gold mines. Factors such as the ever changing US$ and Rand gold price per ounce (related of course to the Rand/US$ exchange rate); labour costs; the current and future grades of ore being extracted; the available extent of ore reserves; the amounts of production which have been sold forward, (ie "Hedged") and so on. All these factors have to be taken into account. And as many of them vary from time to time, as they are changed and influenced by the factors listed, then the proper valuation of any one gold mine is FAR from an exact science.

 

Based on current knowledge and assumptions, the following two categories of gold shares are offered as possible investments for Clients : "Better" Quality Gold shares :  Goldfields; Anglo American Gold (Amgold) and Western Areas (as a very long term gold mine). Western Areas have sold ("Hedged") most of their production forward for many years, but the mine has the largest undeveloped gold orebody in the world and a possible 25 year life).

In the "Speculative" category, mines like Harmony and Simmer & Jack (Simmers) would be appropriate.

 

As has been stated earlier, perhaps Platinum shares would be a safer investment in mining. And, in this sector, the two leading producers are Impala Plats (R950 / share) and Anglo American Plats (Amplats)(R455 / share). These would be far better investments. In the lower priced platinum mines (and of lesser quality), Northam Plats (about R20 / share) is an alternative possibility.

 

So, in closing, it certainly IS possible that the gold price could rise higher. If this happens, then gold shares WILL also rise higher than present levels. The $64,000 question however, is - can these prices and levels be sustained ?

History has shown us that they cannot be sustained. Therefore it is suggested that any purchases in gold shares be made with caution. And furthermore that the exposure to gold, in a well balanced share portfolio not exceed 10% of the total investments. The alternative can always be to look to Platinum and /or to Mining Resources companies.