Gold Fields Ltd. and Harmony – A Technical Comparison

When gold mines are the subject of a conversation, there is often an attempt to group similar mines together. Perhaps the criteria are large mines versus smaller mines, or else North American mines in comparison to South African and to Australian mines. More recently the focus have become hedged mines against others that had not sold much if any gold forward. In anticipation of a sharp and sustained rise in the gold price, it would be wise to know which mines will reap the full benefit of such an event.

Under almost all criteria that can be used, Gold Fields Ltd and Harmony GM Co. are likely to be considered members of the same group. They are both very large mines – with Gold Fields the larger by some margin – and have ample reserves; both of them are unhedged, with little or no gold sold forward. Both trade on the JSE in South Africa, where they are listed, but also have an enthusiastic following in other countries, including the US, where they are available as ADR's (symbols are GOLD and HGMCY).

The phrase, 'as like as two peas in a pod' might well come to mind when an investor thinks about them. Surely, then, one would expect their price performance and turnover patterns to be quite similar. Granted, they differ in detail, such as the recent take-over of Randfontein by Harmony, but at a macro-level their prices and the level of investor interest in these two gold mines should be governed far more closely by the price of gold.

With gold as the prime moving force in the market, it seems even more reasonable to expect that the behaviour of the two stocks over the medium to long and over the short terms would show much similarity.

Yet, as we will see, there are in fact quite large differences between the performance of the two gold mines. Which then raises two questions:

• Can one deduce what lies behind these differences?, and
   
• What are the likely effects on their future performance, particularly if POG really gets into gear?
   

Exploration of the differences is done on a weekly chart that spans the last 5 years or so of price history and on daily charts that look at price behaviour and turnover patterns of the past year. Prices are presented in US currency, but have been calculated from the closing prices on the JSE (Johannesburg Stock Exchange).

Weekly charts.

The analyses of the weekly charts were done much the same. In both cases, the master line from which all other lines were generated was drawn as the support line of the steep 1996-97 bear market in gold and gold stocks. That was during the heydays of the gold carry trade, before events in SE Asia, South America and in Russia upset the apple cart and forced a rear-guard action to keep the lid on gold that is still continuing.

Lines parallel to the master line shows the extent and nature of the bear channels in which prices of both stocks fell steeply. The bear market ended in a gradual if quite volatile recovery in the prices of both Harmony and Gold Fields. Both the shallow bull channels on the two charts were derived from the gradients of the master line, the difference being that Harmony is recovering in a relatively steeper channel than the shallow bull channel occupied by Gold Fields.

Harmony weekly chart. Last = $5.22

Channel X-Y is the second shallower derivative of master line M. That means the gradient of M was multiplied twice by the Fibonacci ratio (0.618034 . .) to result in a gradient that is 0.382 of the gradient of M. The fit within channel X-Y is quite good, with the fit of line Y through the second low as exact as one could wish.

Some figures that later will be used for the comparison are:

Decline in the bear market:	$13.20 to $1.86 for a total decline of 86%
Recovery to high in Feb 2000:	Reached $7.20 for a gain of 286%.
Decline since the high in February 2000:	Down to $4.92 for a decline of 32%

Gold Fields weekly chart. Last = $3.27

The relevant statistics are:

Decline in the bear market:	$18.60 to $2.17 for a total decline of 88%
Recovery to high in Feb 2000:	Reached $5.50 for a gain of 154%.
Decline since the high in February 2000:	Down to $3.16 for a decline of 43%

Observe that Gold Fields achieved a higher high early during the current rising trend. It was at $5.88 in October of 1999, for a gain of 171%, but failed to improve on this high later in February this year. In the case of Harmony, the October and February highs were practically the same.

During the steep bear market, the two stocks performed practically the same. Harmony bottomed some months before Gold Fields did, but that does not seem too important. What is striking is that the recovery since the second half of 1998 has favoured Harmony substantially more than what it did Gold Fields.

This was the time when Harmony started to attract attention as an up and coming gold mine, making a number of acquisitions. Gold Fields, on the other hand, was involved in deals of a different kind, absorbing Driefontein in full with Anglo American Gold leaving centre stage.

One could argue that these differences between the two mines affected their ratings by investor – Harmony coming more into favour, Gold Fields being treated with a greater degree of scepticism and circumspection.

If so, it seems logical that Harmony would show a greater degree of volatility in its turnover – buyers rushing in when the price of gold moves steeply higher, as it did on two occasions in less than a year, more to accumulate shares for the longer term than with more speculative, near term objectives. This would imply less profit taking when gold failed to follow through and prices of gold stocks peaked and started lower, and thus a greater degree of price stability.

With Gold Fields more out of favour, it can be expected to show relatively fewer changes in turnover when gold leads a charge on gold stocks, but high turnover when prices peak, followed by a steep fall in the price the moment supply increases.

Daily charts

The daily charts show a period of 256 trading days, stretching back to May 1999. The upper half of the chart displays a line chart, with a deltaP/deltaV (dPdV) chart in the lower half. This kind of indicator has been discussed previously and the article is still available from the Archives.

Briefly, the chart is an overlapping display of a MACD of price (gray bars) and a MACD of turnover (blue bars). As my primary data is on the SA market (JSE), this analysis of turnover reflects the number of shares traded on the JSE.

As with all MACD charts, gray bars above the base line represent rising prices, while blue bars above the base line indicate that turnover is increasing. Similarly, gray bars below the base line are associated with a declining price and blue bars below the base line reveal that turnover is falling.

Harmony. Daily chart, with dPdV. Last = $5.22

It can be seen that over the past year Harmony moved within a horizontal channel, M-A-B. It recently bounced off support at line B, but then reversed direction again just a fraction short of resistance at line A.

The values of the horizontal lines are indicated on the chart.

The dPdV charts shows an MACD of the price (brown bars) and an MACD of the volume (light green bars). Certain places of interest on the dPdV chart are indicated. These are:

A: The mainly sideways to bearish trend during the second quarter of 1999 took place almost in a vacuum – investor interest was low and the price drifted lower with only one occasion of buyers showing their presence with a jump in turnover. A flurry of buying in July/August raised the price a little, but did not follow through.

B: When the Washington Accord was announced, the price jumped steeply in response, doing so initially on very high turnover – some holders of Harmony were eager to get out of a "dying market" and used the opportunity to sell. Supply nevertheless dried up quickly and the turnover fell away.

C: When prices peaked on little or no aggressive selling, remaining buyer interest formed a floor for the price. This meant that the price steadied in a kind of plateau, rather than fall away completely. One increase in the price took off on still low volume, but quickly subsided when sellers came in to satisfy demand (the late increase in turnover). This time the price fell a little more steeply, perhaps because so much demand had been satisfied.

D: As the price reached new lows following the steep jump in September, buyers showed their presence in sporadic increases I turnover. Their timing was excellent, as they barely happened to beat the second spike in the price – during February, in reaction to a jump in the gold price.

E: There was a longer period of profit taking during the steep rise in the price than was evident in September/October of 1999. As a consequence, when gold failed to follow through there was less demand around than on the previous occasion and the price slumped further than it did in late 1999 – despite a little rally that failed to develop further (F).

G: The price fell steeply and began to draw new demand into the market – as can be seen from the occasional spurt in turnover. More recently, as gold held above $280 at first, the demand picked up again and the price started to react – only to start falling again when gold failed to hold above $280.

Gold Fields - Daily chart, with dPdV. Last = $3.25

On the price chart, master line M and its second shallower derivative, F2, forms a triangle formation. The US price has just completed leg 2 of this triangle and should in principle move higher to M in order to complete leg 3. In trying to doing so, it would meet substantial resistance at the horizontal line, H.

The dPdV chart looks very much like that of Harmony, except for the great and sustained increase in turnover towards the latter part of the steep bear trend that had started in mid February. The same discussion as above for Harmony applies here too, except for the recent anomalous high turnover, which, in a falling market, must be due to fresh demand.

Normally one would expect that such strong demand would have a significant effect on the market and be able to turn the trend around in short order. However, whoever was selling just kept on feeding the market and the price continued to decline until the time that the whole gold market started to show signs of life.

And then suddenly the turnover fell away. This could be due to either a lack of demand, in which case the price would not have reacted by as much as 15% off the low, or because the supply has dried up – which seems the more probable cause.

Discussion

If one examines the two dPdV charts, it looks as if Harmony and Gold Fields actually had much similar treatment from investors – rather against our earlier assumptions – except for the recent high turnover, of course.

The picture becomes a bit more clouded when actual turnover volumes are compared. The prices of the two stocks are in the same ball park and one would assume that a prospective buyer would make his decision more in terms of the quality of the stocks than because one was cheaper than the other. Similar amounts invested in the two stocks would thus result in similar levels of turnover. Based on our earlier assumptions, though, Harmony should display evidence of interest from the market in the form of higher turnover to a greater extent than what Gold Fields did.

Mine	09/27 – 10/11	11/3 – 11/24	02/1 – 02/22	03/1 – 03/22	04/4 – 04/26
Harmony	100 (4)	11.9 (0)	68.2 (2)	21.2 (0)	30.6 (0)
Gold Fields	100 (13)	48.3 (6)	94.4 (14)	21.1 (0)	61.1 (10)

This table shows just the opposite. (Average turnover expressed as a percentage of the turnover in late September/early October 199. The number of days with turnover above 1 million shares for each period are shown in parentheses.)

The turnover is indexed to the turnover in the first period to reduce any confusion that might be caused by differences that arise out of the fact that the two companies have different numbers of shares in issue and different numbers of free floating shares. The actual averages for the first period was 800 thousand shares per day for Harmony and 1.8 million shares per day for Gold Fields.

It is clear that Gold Fields was much more active in the market than was the case for Harmony. This is true of the absolute numbers, but is even more striking when all the periods are compared. Relative to the high volume of the first period, Gold Fields maintained a much high relative turnover than Harmony for all except the bear trend that is represented in the period spanning most of March. That was when Gold Fields declined from R30 to R26.50 ($4.80 to $4.10) on its way to a low of R21.20 ($3.16), doing so on a sharp decrease in turnover, similar to what Harmony experienced over that time.

If so many more investors were interested in Gold Fields, why such a poor performance of the price relative to Harmony ever since the Washington Accord?

From the time of the Washington Accord to mid November, in the aftermath of the sharp spike in gold, the price of Harmony declined by about 12%; the price of Gold Fields fell by over 30%. Later, from mid February to late April, Harmony declined by about 30% and Goldfields by almost 40%.

In April, Gold Fields of SA and Gencor, two mining houses that owned about 77 million shares in Gold Fields between them, unbundled this holding by distributing the shares to shareholders of the two mining houses. Anticipation by investors of substantial selling by new owners who were weak hands, may well be the reason for a relatively larger decline in Gold Fields during March, compared to Harmony.

This would also explain, at least in part, the much higher turnover for Gold Fields during the last period in the above table (April 2000).

It seems unlikely that this could have been the reason for the relatively steeper decline in the price of Gold Fields during October/November last year, on relatively high turnover – which is indicative of large supply present in the market during this interval. Nor would it explain the sharp increase in the price of Gold Fields during February this year, again on a substantial increase in turnover – which shows that demand was particularly strong, despite a large absolute and relative increase in supply.

Speculative analysis

It is my guess that with the events surrounding the formation of the "'New' Gold Fields, the Gold Mine", some financial institutions became large holders of Gold Fields stock, but did not really want to be in the gold mine business at all – at least not in Gold Fields.

At the same time, or perhaps only in early 2000, South African financial institutions suddenly realised in the wake of the Washington Accord that they may have divested themselves of their birthright, when they drastically reduced their exposure to gold during the 96-97 bear market – selling consistently to buyers that were mostly foreign. As a consequence, they (all of them or only some?) were keen to lay their hands on gold shares, provided they could do so in quantity without pushing prices too high.

Some may have been quick off the mark in October 1999 and managed to pick up quantity in Gold Fields, when there were large sellers waiting in the wings who were pleased to get out of what they perceived to be a dead market – or the wrong gold company. The same happened in February, when Gold Fields showed a good increase in price on massive increases in turnover – an anomalous course of events that can only be explained if institutions were bidding against each other in order to obtain quantity at what was still a reasonable price.

Gold Fields experienced a relatively greater drop in turnover after the beginning of March – on a rapidly falling price. IMHO this was a time when the large buyers of February ware taking stock of their positions and thought it would be a good idea if they could manage to pick up another large number of Gold Fields shares at a much lower price than what they had paid in February. Even more so if they had learnt that about 77 million shares would be unbundled in April and much of this could flood onto the market .

This is probably the reason why the market down-rated Gold Fields by 30% between early March and mid April. Yet it presented anyone who was waiting to pick up a large volume of Gold Fields stock with a good opportunity at bargain prices. As it turned out, really good volume of supply descended on the market out of what obviously had to be weak hands suddenly stuck with a lot of Gold Fields shares, as buyers could obtain stock in good volume without any effect on the price – in fact, the price kept on falling!

Suddenly, just as forces acting on the whole gold market started to improve the outlook, the turnover fell away again. Did buyers stop buying or have the sellers either run out of stock or decided to sit back and rather see what the future holds? About 20 plus trading days at just over 1 million shares per day are not enough to account for the 77 million shares that were unbundled. Either the remainder are in stronger hands, or volume could again come onto the market once the price improves.

With JSE price of Gold Fields improving by 20% - after a 50% jump in the US – before the most recent decline, it would appear that it was the sellers that stopped selling – for whatever reason – while buyer interest was still alive out there. Yet the fact that the JSE price did not nearly reflect the jump in the US price shows that there is still some supply waiting in the wings.

The future

Despite the supply that seems to be available when the price improves, this is promising for Gold Fields for the future – once gold gets itself geared up and starts to make a real move in the right direction. The high turnover of the past 10 months must have reduced the amount of stock held in weak hands, while there is evidence that major buyers are willing to accumulate large positions in Gold Fields, when the occasion is right. When gold really gets going, buyers of Gold Fields may find some increase in supply at first, but then will have to bid up the price quite dramatically if they hope to get orders filled.

Starting from a lower base, Gold Fields Ltd. should at last outperform Harmony and wipe out the effect of its poor performance relative to Harmony over the past 10 months.