A highly critical view of investment in South African gold stocks is taken by Neil Brown and Richard Hasson, co-heads of Old Mutual's Select Equity Investments Group in South Africa, particularly in the light of their feeling that the yellow metals ‘safe haven' status has fallen away as in their words gold no longer acts in any form of anchor in the global financial system. In this respect they feel that the importance of gold shares in a portfolio is perhaps overstated.
Ultimately gold is a precious metal and an investable asset, similar to other assets such as equities. they say. Therefore, gold should also be valued against these other investment alternatives.
In their view they evaluate gold as with any other industrial commodity, looking at supply and demand fundamentals as key determinants of the gold price over time. They rate the jewellery market as being basically stable, but prone to price sensitivity while above-ground stocks, largely held by global central banks are providing the balance as mine supplies are beginning to diminish.
They thus feel it is important for the gold sector that prices should be kept at a level which enables miners to earn a fair margin, but not too high so as to encourage central bank and investor sales and the entry of new marginal mines. In their view $800 an ounce is the kind of level that the market should support.
Select Equity is particularly critical of South African gold stocks because of their historically low returns on capital which they feel have consistently destroyed shareholder value and they feel that, despite recent strong earnings growth, ever increasing mining depths and safety issues will continue to do this.
While the fund managers anticipate earnings growth in the gold sector to outperform the overall market over the next year, they feel that history suggests that in the medium to long term this advantage will not be maintained and thus they rate the gold miners as poor quality businesses in their investment terms.
As for mining stocks in general they prefer diversified stocks and prefer companies such as Anglo American and BHP Billiton. Thus they hold zero gold share exposure, but may from time to time move into a gold ETF which, they feel, gives the fund exposure to the rand gold price.
While these may be valid viewpoints, particularly with respect to the local South African situation and stocks quoted on the Johannesburg Stock exchange, we would probably differ on the analysts' views of gold's safe haven status. This is very much a take on the strength of the recent general stock market recovery which may yet be a false dawn. In terms of the South African stocks themselves it does seem to ignore the fact that some of the key players here are very much in a recovery phase and the short term advantages may continue for rather longer than anticipated in the report - depending of course on the progress of the gold price and the performance of the SA rand.