The unsolicited bid by Harmony for Goldfields dominated the gold sector this month. A paper offer of 1.275 new Harmony shares was made for every Goldfields share, valuing the latter at over R52-billion. This was done at almost a 30% premium to the Goldfields share price. The gold fund benefited from this as Goldfields stood as the largest holding within the fund at quarter end. The pros and cons of the transaction will be weighed and we will be voting in a manner that, we believe, will benefit our unit holders over the long term.
During the course of the month, the rand also rebounded by more than 5% to close the month close to R6.10 to the US dollar. The strong rand has negated the benefits of a rising gold price. The Reserve Bank also kept rates on hold despite some calls for another rate cut. The gold price has benefited of late from a number of factors, which has boosted speculative interest. The recent close correlation between the oil price and gold seems to hold, as concerns rise that a higher oil price will result in a global economic slowdown. The US dollar has also been weak on the back of poor economic data and the market is also awaiting the outcome of a closely contested US presidential race.
Back in South Africa, the September quarterly results yielded disappointing outcomes as per our expectations. Harmony continued to post a headline loss and Goldfields posted lower earnings than the previous quarter. Anglogold showed some improvement, but earnings remain under pressure due to rising costs. Valuations within the sector remain stretched and we retain our cautious outlook on gold shares.

This quarter was undoubtedly dominated by the volatile rand. After strengthening to below R5.90 to the US dollar, the currency weakened on the back of a surprise rate cut by the South African Reserve Bank in August. Over the course of the quarter, the rand has weakened only slightly from R6.20 to R6.40 to the dollar. The gold price, on the other hand, has strengthened from below USD400/oz to over USD410/oz towards the end of September. The combination of a slightly weaker rand and a stronger gold price has led to the rand gold price advancing more than 7% during the quarter to settle around the R85 000/kg level.
Overall, gold shares performed well, rising by more than 20% during the quarter. A large part of the rally occurred after the Reserve Bank cut rates unexpectedly in August. The shares found their second wind towards the latter part of September as subdued US data and a strong crude oil price provided more impetus for the gold price. While we remain positive that the gold price is well supported, both by fundamentals and by currency speculation around the USD400/oz mark, the behaviour of the rand remains a concern.
We expect the forthcoming gold quarterlies to indicate that the environment for gold mining in South Africa is still hostile. The gold producers are taking some drastic action to curtail costs and restore profitability, risking damage to labour relations in some instances. We remain positive that the reverse takeover of Iamgold will yield positive spin-offs for Goldfields and, in the longer term, we should see some potential value unlocked as a result of the merger of Anglogold and Ashanti.

The dead cat bounce in the gold index in May was followed by further weakness during the course of June, with the strong rand being the main feature. The rand gold price briefly dropped below the R80 000/kg mark and the gold index lost some 10% of its value during the month. The rand strengthened on the back of a weaker dollar and various rumours in the market about intervention by corporates/parastatals in the currency markets.
During the month, the gold price initially declined to below $385/oz following a bullish speech by Fed Chairman Greenspan, who warned that US interest rates would rise at a measured pace. The dollar also staged a mini-rally from $1,23 to $1,21 to the euro. However, the dollar gold price did an about-turn and strengthened again towards the end of the month. Geopolitical risk looks to have been a driving force as we neared the deadline for the handover of Iraq by coalition forces and as violence in the region escalated. Speculators appeared to rebuild long gold positions.
The negative newsflow relating to gold miners continued during the course of the month. In Africa, Anglogold Ashanti faced a strike in Mali and was still embroiled in a ban over the export of gold with the government of Guinea. ERPM mines - jointly owned by Durban Deep - announced a process of retrenchments and mine closures. The fund manager's anticipate that gold mining earnings will continue to come under pressure at the current rand gold price and, consequently, the fund manager's retain the funds defensive position in the fund.

The chances of an early rate hike by the Federal Reserve were boosted this month by comments by Fed Chairman Alan Greenspan that the US economy was growing and that US companies have regained pricing power. This boosted the US dollar, which broke the through 1.18 mark against the Euro during the month, strengthening to levels last seen in November 2003. Some negative news also emanated from China where the Government has vowed to cool off the economic bubble. Gold suffered as a result and dived below $390/oz level in tandem with other metals.

Locally, the impact of a sharply lower gold price was softened by a weaker rand, which slipped some 9% during the month. Nonetheless, the rand gold price received by gold mines remains at the low level of R85 000/kg. Coupled with high wage inflation, this continues to put acute pressure on the margins of these mines. Anglogold came up with a profit warning that quarterly results were down more than 50%, due mainly to underperformance by some its overseas mines and the Christmas break in South Africa. In addition, Harmony’s announcement that it intended to close six Free State shafts and retrench some 5000 workers bears testimony to the tough conditions faced by local producers.

With the disappointing first quarter results a thing of the past, the focus shifts to the future, but there appears to be little respite on the horizon in the short-term. The efforts by gold mines to cut costs in the face of a stronger rand are being curtailed by the threat of strike action, which could weigh negatively on sentiment. The gold fund remains defensively positioned, favouring higher margin shares like Goldfields.

The quarter was characterised by considerable precious metal price strength, which was again partially offset by a strong rand. The gold price moved through the $410/oz level - its highest mark since February 1996 - on the back of a sagging US dollar, which weakened to record lows of over 1,24 to the euro. The rand was very strong during the quarter, approaching the R6.20/$ levels in December before weakening slightly later in the month, despite a lower than expected rate cut by the Reserve Bank.

Gold shares continue to deliver mixed performances. Anglogold, the largest position in the fund, delivered sterling quarterly results and clinched the acquisition of Ashanti. The fund manager's reduced the funds holding in Goldfields considerably in anticipation of disappointing results. Corporate activity continued, with Harmony making a bid for Avgold during the quarter. However, the sector was rocked by news of the closure of open-pit mining at Aflease and large-scale retrenchments at the marginal gold producers.

The platinum price bounced by over $100/oz during the quarter on the back of an announcement by Angloplats that it would cut future expansion plans. The fund manager's are satisfied that the valuation of platinum shares justifies the position that the fund manager's have taken in the sector. The fund manager's also remain positive that Anglos offers exposure to a rising commodity cycle.

Looking ahead, the fund continues to favour higher quality gold producers, but the fund manager's remain cautious that the forthcoming quarterly results are likely to be disappointing. The behaviour of the rand remains key to the performance of the fund.

Due to recent amendments to the foreign exchange regulations as regards the maximum exposure of retirement and other funds to foreign assets, it has been decided that the fund should henceforth focus exclusively on domestic assets. The fund's mandate has thus been amended to allow only for investments in domestic assets. In order to make the fund a pure South Africa only fund, the fund manager's thus disposed of the foreign holdings.