Gold has had a good start in 2016 with bullion up over 16% YTD driven by an overall concern on the global economy and a new world that keeps pushing towards negative interest rates. The resurgent interest in gold has taken gold equities along for the ride.

For the stocks, the beginning of 2016 has looked a lot like early 2014 and early 2015, with both higher gold prices and early M&As offering investors perhaps the promise of a little brighter year. Companies have also taken advantage of the positive sentiment and the rally has led to a number of equity financings (FNV alone taking $920mm).

As we wrap up 2015, we note that companies that fully executed on their goals and deliver good operational results have been rewarded. Also what came out of the year-end releases is that despite the industry’s efforts to cut cost in a “sustainable” way, reserves keep getting lower and production outlooks have, for the most part, been reduced. As investors regain confidence in the sector and favour FCF, management teams are perhaps finding it difficult to strike the balance between CF and investing for the future.

Eoin Treacy's view

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The Fed’s go slow policy for rates has acted as a headwind for the greenback and has reignited US Dollar denominated interest in precious metals. ETF Holdings represent a powerful barometer of that interest and the downtrend has been broken suggesting a pattern of accumulation is underway. This follows a lengthy period of dissipation of interest in gold among investors. 

Gold prices are rallying faster than a number of other currencies against the US Dollar. It is benefitting from Dollar weakness, its status as a safe haven and the cost of carry argument has been annulled due to negative yields on trillions of Dollars of international debt. The price remains in what has been an orderly consolidation of earlier gains and a sustained move below the trend mean, currently near $1160, would be required to question medium-term recovery potential. 

While investor appetite for gold trackers is increasing, it is worth revisiting whether this is now the best way to gain leverage to the gold price. Gold ETFs sapped demand for gold equities at the beginning of the bull market more than a decade ago. The expansion plans gold miners embarked on following decades of getting by on legacy operations meant they had no free cash flow and underperformed gains in the gold price. This added further impetus to gold ETF holdings. However gold miners have been through a very painful process of rationalisation which has now ended with the result that the NYSE Arca Gold BUGS Index has broken its relative downtrend compared to the gold price. This is all the more noteworthy because it had fallen to historic lows prior to the recent rally. 

GoldCorp shares a similar pattern to the above ratio and has now rallied to break the four-year downtrend. 

Sibanye Gold continues to extend its uptrend and a break in the short-term progression of higher reaction lows, currently near $13.50, would be required to check the advance.