The question that is hot on everyone's lips at the moment, is whether or not it is the time for resources and commodities to start rallying. Or in other words, should we be buying shares in resource companies and/or mining houses? In truth, this is a question that I am not yet comfortable to answer. There is still considerable evidence that the trend in these sectors is down, although signs that this down trend is starting to change are beginning to surface. Are we then to believe that the down trend will suddenly turn up for good? And with the very cheap valuations attached to many of the mining houses and resource producers, will they suddenly become the best investments available in the market? Once again I do not know, yet. I am patient enough to wait for confirmation before making any investment decisions. And so should you be.
This being said, it does help to be prepared. When the change in trend is confirmed and the time comes to invest, it will be of great benefit knowing which company, or companies, would make for the best possible investment. There are a few out there with very cheap valuations and much potential. I will however only be focusing on one at this time; that being Gold Fields Ltd (JSE:GFI).
First and foremost, is the recent news and the on-goings at the Gold Fields KDC mines. With the bulk of its operations in South Africa, this strike action should be taken rather seriously I deem. If it is amicably resolved within the next week or so, then GFI would earn a higher spot on the 'shares I want to buy' list. If however the political unrest (caused mainly by what is believed to be a faction within the ANC - with Julius Malema as its front man - believed by some to be plotting to oust President Jacob Zuma) and strike action continues, then GFI would lose a fair amount of places on my aforementioned list.
Taking my focus off the noise in the market place and looking at some of the fundamentals of GFI, there are a few things that stand out to me. A P/E ratio of 8.85 and a dividend yield of 3.79% are not fantastic, but they are not all that bad either. Something else worth considering is the higher Gold price and weaker ZAR combination. I am of the opinion that the worst is yet to come for the ZAR and that soon it will have lost some more strength against the USD. Then there is the case of QE (Quantitative Easing) and the effects it has on inflation, which in turn leads to a rush for an inflation hedge, which spells a higher gold price (and equity prices for that matter). So a weaker ZAR and a higher gold price can only mean better profit margins for ZAR based gold miners. Also note worthy is that a rumor has circulated that the FED will start treating gold bullion as a near-cash reserve for banks to make loans against. This does certainly paint a profitable picture for a member of the top 5 gold miners in the world with an estimated 281 million ounces of reserves.
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| GFI - Daily |
Looking at the chart above, I have indicated the support area (R95.00 to R96.00) in which the potential value in GFI will be maximised, so to speak. This is the area in which I would start buying GFI, provided that it gives me the opportunity, and that the mine is still standing of course. There are more support levels further down, so if I am lucky enough to buy there, I would be pleased, however this might be unlikely as some analysts have called for a R130.00 price target. So the indicated area is where I will start to scaling into a long position in GFI.
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