Article / 19 June 2015 at 3:15 GMT

Global ructions bring back the glimmer to gold

Head of Private Sales / Saxo Capital Markets - South Africa
South Africa
  • Gold set to provide investment opportunities over the next two quarters
  • Speculation of an Asian market bubble could attract investors back to the metal
  • A curve ball could be the upcoming wage negotiations for mineworkers
  • But gold producers with clean wage-talk processes likely to receive support

By Dylan Bester

The slump in global commodity prices, strength in the US dollar, possible Greece default and an Asian stock market boom has contributed to a very uncertain and volatile outlook in global markets.

Amidst speculation earlier this year of a possible Fed rate hike, which provided massive support for the dollar across most currencies over the past six months, the latest release of slow growth figures from the first quarter and the recent Fed meeting has changed the view for further support of the USD into a weaker bias.

Investors are searching for a safer asset to accumulate, and looking at our local market and underperforming resources sector, the current gold price could provide some investment opportunities over the next two quarters.

Higher lows over the past 12 months

The daily chart below shows gold priced in dollars indicated as a candlestick chart in black, which reflects that gold has been making higher lows over the past 12 months. Consolidation between $1170 and $1215 over the last four months is shown in orange and indicated by a line chart, which is the Satrix equivalent of the resources sector. 

I have drawn a line to show the lower highs that have been forming since the beginning of the year, which has been supporting the increase in the sector's value.

Souce:Saxo Bank
Source: Saxo Bank 

Resources sector to also benefit

A flag formation on the Resources Index that has formed this year is indicated by a technical wedge, which could provide support around 4000 and resistance around 4500. A breakout of the resistance/support areas would open up the continuation of the price in that direction, equivalent to the length of the downward move seen before the flag formation indicated by the downward sloping line.

STXRES Index
















Source: Saxo Bank

Asian demand for gold may return

The Shenzhen stock exchange has increased its value by 134% and other Asian exchanges have shown double-digit growth over the past 12 months. This has been providing Chinese and Asian investors with local stock market growth and an alternative investment to gold. 

This can be associated with the weakened demand for gold, however, speculation of a Shenzhen and Asian market bubble forming with forward P/E ratios reaching unsustainable levels could reflect a cautious approach by investors who could possibly look to alternatives, such as gold.

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Copy that ... wage negotiations for mineworkers begin on Monday and need to
run smoothly if uncertainty around gold is to be avoided. Photo: iStock

Upside for resources sector

Considering that gold counters and the physical commodity itself could attract investment flow and support off these low levels, the resources sector could also provide further support to our local bourse to sustain some medium-term growth on the upside.

Wage negotiations could be the curve ball

David Sipunzi at National Union of Mineworkers was elected on June 5. He might want to prove his credentials as the new leader and possibly hold out for higher settlement levels that weren't achieved by his predecessor. The negotiations start next week on Monday, June 22. The factors to watch are the progress of the talks and settlement levels, the possibility of strikes and the timeframe in which these could last.

Gold receives short-term boost

Leading up to the wages talk, negotiations and the possible threat of strikes, a boost for the gold price is being witnessed. But for a more medium to long-term outlook, the negotiations need to run smoothly and a deal has to be settled within a short period of time as it could create further uncertainty.

Gold producers, which have solid production targets and a clean wage negotiation process, should receive some support as the lower price in gold has been driving down gold-producing company stock prices.
 
Gold is also a hedge against inflation, which is anticipated by market participants to be on the rise.

The chart below shows the performance of three gold producers (Anglo Gold, Sibanye and Goldfields) over the last year. Circled are support levels from previous buying areas.

Gold stocks overlayed
 Source: Saxo Bank. Create your own charts with Saxo Trader; click here to learn more.

– Edited by Gayle Bryant

Dylan Bester is a trader at Saxo Bank's South Africa desk

1y
Scubacat Scubacat
Dylan , whats your view on Anglo ?

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