Tag: Commodities

Gold Surges


Six weeks ago, on 24th June 2019, we ran an article about gold under the heading “New Gold Bull”. In that article we drew attention to the fact that gold in US dollars had broken convincingly up out of a long-term wedge formation and we suggested that it was probably entering a new bull trend. Since then the dollar price of gold has risen by a further 7,8% to reach $1506. Consider the chart:

US Dollar Gold Price October 2010 to August 2019 – Chart by ShareFriend Pro

For South African investors, however, an investment in gold or gold shares on 24th June 2019 would have been significantly enhanced by the recent collapse of the rand to levels above R15 to the US$. The rand price of gold has surged from R20052 to R22596 – a gain of 12,7%.

Gold always has been and remains the world’s best defense against the weakness of paper currencies. It is the ultimate store of value. Unfortunately, it does not pay any dividends rent or interest, but it holds its value through thick and thin. Read More

The Confidential Report – August 2019


The Rand

For most of June and July this year, the rand was strengthening as international investors became more confident of the reforms which the Ramaphosa administration was implementing. Now the battle between Ramaphosa and the Public Protector has become sufficiently aggressive and dangerous to unnerve international investors – causing some of them to withdraw their funds from our government bonds with the result that the rand has fallen 7,5% in the last two weeks.

The yield on our R186 long bond has increased by 6,3% to 8,46%. Overseas investors are now willing to forgo this relatively high return because of the increased political risk in the country. Clearly, this trend is not good for South Africa or private investors. The fight within the ANC comes on top of the problems of financing Eskom and lower tax collections to indicate that the government deficit is probably going to widen substantially. Moody’s is under mounting pressure to follow the other ratings agencies and downgrade us to sub-investment.

Unfortunately, it is very difficult to ascertain exactly what is happening behind closed doors. We can only watch the markets, especially the rand and the yield on the  R186 for clues – and right now the news on that front is not good. The markets are communicating that there is a chance that Ramaphosa might lose his position of power in the ANC – and if that happens then the economy and the stock market will be in dire straits.

A new concern has arisen with RMB’s John Cairn’s saying that there is a high probability (47%) that the rand will fall by as much as 30% or more once the US begins a new cycle of reducing rates over the next year – simply because it always does that when interest rates are falling in the US. Against this, it seems that the recent cut in rates in the US is just a “mid-term adjustment” and not the beginning of a new trend of lower rates. Read More

The Confidential Report – July 2019


US Economy

The US economy has been expanding for 121 months – a new all-time record. This persistent growth over such a long period of time has seen the unemployment rate drop to just 3,6% – its lowest level since the 1960’s. And that growth is being followed by a strong bull trend on the S&P500 which is now in its 11th year (it started in March 2009). Economists in America are asking questions:

  • How long can this go on?
  • With unemployment so low, why is inflation below 2% (it was 1,8% in May)?

Economic theory says that once the economy reaches “full employment”, usually defined as somewhere when the unemployment rate drops to between 4% and 5%, then wages will begin to rise leading to inflation. But the average wage in America is remaining stubbornly low. Economists are at a loss to explain. Read More

New Gold Bull?


Gold is the ultimate hedge currency. Its purchasing power has not really changed significantly throughout the 5000 years of recorded human history. One ounce of gold would buy you roughly the same number of chickens today as it would have bought you in Egypt in 3000 BCE.

So, traditionally, gold is a hedge against the weakness of paper currencies – and indeed of all financial assets. The problem that gold has is that it does not give any kind of return. An investment in gold does not pay rent, interest or dividends and it does not add 10% to its weight every year. For that reason, the most secure financial assets, like the 10-year US treasury bill always seem preferable because at least they have a yield per annum of around 3%.

Over the past ten years, in a desperate effort to overcome the impact of the sub-prime crisis and avert the “great recession” the governments of the world, and especially the US government, have printed and injected more than $12,5 trillion into the world economy (through “quantitative easing”). That additional cash has not resulted in rising world inflation, mainly because of fear and low confidence levels. At the same time, the sharp fall in the oil price in 2014 has kept world inflation at very low levels. Read More

Sasol


Commodity shares are generally more risky than industrial or financial shares because they mostly do not have any control over the selling price of their products. The commodities which they sell are mostly priced in international commodity exchanges and subject to wild fluctuations. Sasol is really no exception. It is in the oil business and the chemicals business. In both cases the pricing of its products is largely outside its control. Despite this, Sasol offers investors an interesting option. It is an extremely well-run company with a very strong balance sheet and it is busy diversifying away from oil.

Like most South African commodity companies, its profits are impacted by the strength of the rand. When the rand appreciates, Sasol becomes less profitable and vice versa.

It has its roots in the oil-from-coal technology developed during the apartheid era in South Africa, but today about 50% of the company’s profits are directly linked to the oil price. It has two main growth areas – its $12,9bn ethane cracker plant in Louisiana, America, known as “Lake Charles Chemical Project” (LCCP), and its development of gas resources in Mozambique.

Sasol was recently awarded two new licences in Mozambique to explore for gas in an onshore development of approximately 3000 square kilometres. This could significantly add to its existing gas projects in the Rovuma province. Read More