Gold, or gold shares?


Johannesburg - If you want to invest or trade a gold share like Goldfields, it makes sense to have an opinion on where the the yellow metal's price is heading. 

There should be a correlation. If so, should you invest in gold shares or in physical gold?

How often have you heard people expressing an opinion on the gold price, and then simply conclude that gold mines should follow that movement? I have compared the gold price since 2006 to the price performance of Goldfields.

For this, we used a weekly chart to fit all the data.

The black line and right-hand scale is that of Goldfields, while the pink line represents the gold price in rand.

The relative strength index below is that of Goldfields.

Notice the following:
1. Price was mainly trending between Support 1 and Resistance 1 in a channel;
2. The price channel is clearly trending down;
3. Price is up against a four-year resistance that wasn't overcome, not even when gold was at a record high.

Looking at the gold price (rand), notice the following:

1. Price trended mainly in a channel as indicated by Support 2 and Resistance 2;
2. The price channel is clearly up;
3. The gold price is up against resistance.

In the RSI graph below, we notice the following:
1. The RSI graph (which indicates oversold at the bottom and overbought at the top) indicates that price is up against resistance, and relatively overbought in this case.

This resistance at around 60 has not been exceeded over the recent four years.

In late 2008 the gold price surged from R6 000 to R10 000, an increase of 66% in about 22 weeks. Shortly after the rally in the gold price began traders started buying Goldfields, advancing it off a R54 low and buying it right up to R123, lifting Goldfields by 127% off the low.

In percentage terms, Goldfields was pushed up twice as much as the gold price.

But one can even look at shorter intervals and have difficulties finding any significant period where the two prices show a high degree of correlation.

In 2006 Goldfields was trading at R130. Now, four years later we find that Goldfields is trading at R100. This results in a loss over this period of 25%.

In 2006 gold was trading at R3 000. Today you find gold trading at about R9 400. Where Goldfields lost 25%, gold gained by 300%.

Two conclusions follow this discussion:

Don't attempt to predict the price of a gold share based on your prediction of the gold price. Even if you are right on the gold price prediction, you will most probably be wrong with you share prediction.

If you want to invest in gold, it is probably much better to invest in the physical commodity than in the share. Especially over the longer term, you should have a far higher return on your investment.


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