Is The Canary In The Gold Mine Coming To Life Again?

A Chirp from the Deep Level Mines

Back in late 2015 and early 2016, we wrote about a leading indicator for gold stocks, namely the sub-sector of marginal – and hence highly leveraged to the gold price – South African gold stocks. Our example du jour at the time was Harmony Gold (HMY) (see “Marginal Producer Takes Off” and “The Canary in the Gold Mine” for the details).

Mining engineer equipped with bio-sensor/Photo credit: Hulton Archive

As we write these words, the HUI Index is well off its intraday highs, apparently in response to the broader stock market attempting to recover. In other words, another short-term pullback in the gold sector could easily be in the cards. But something is cooking in South African gold stocks, that much is absolutely certain. Here is a chart of the JSE Gold Index in ZAR (South African rand) terms:

South African gold mining stocks break out with authority.

We actually mentioned an earlier breakout attempt in these pages that ended up getting rejected the very next day, after GFI (Goldfields) reported earnings the market didn’t like at all. In particular, the company had to admit that it was still failing in its efforts to make the South Deep mine (its largest asset by far) profitable. The index promptly nose-dived to a new interim low. This time we decided to wait until after the breakout, to avoid jinxing it again.

After the GFI-induced shellacking, the index gradually recovered and has in the meantime broken above two resistance levels post-haste, in a quite stunning short-term rally. Gold stocks were the by far best performers on the JSE both on Thursday last week and today (Monday). HMY, for example, tacked on almost 19% on Thursday and another 10.6% today – in ZAR terms of course.

The JSE Gold Index is following the lead of the JSE Platinum Index, which had already broken out ahead of it in September, as no negative surprises were reported by its major constituents. To be sure, there were a few bad earnings reports in the platinum sector, but nothing unexpected occurred. In fact, after posting a huge headline loss due to taking large write-offs and announcing a major restructuring of its flagship Rustenburg mine, the stock of Impala Platinum rallied quite strongly. Here is a chart of the platinum index: