Leaders and Laggards

We have recently discussed the odd dichotomy that can be observed within the gold sector – there is a group of stocks that is doing extremely well lately (in fact, a number of sub-groups have acted well for quite a while), and another group that is lagging terribly in terms of performance. Many of the laggards happen to be domiciled in Canada (their production is however spread over numerous jurisdictions in many cases).

Night view of KGG’s Tasiast operation in Mauritania

Photo credit: Kinross Gold

As a trader, one is supposed to focus on leaders, not laggards (either on upside or downside leaders, depending on the direction one trades in). However, leaders can at times switch, i.e., a laggard can easily become a leader. This is what happened for instance to TSLA in 2013, and in the gold sector it happened just recently to South African producers (HMY, DRD, AU, SBGL).

A chart illustrating the vast discrepancy between leaders and laggards in the gold sector – the ratio of Canadian producer Goldcorp (GG) to South African producer Sibanye Gold (SBGL). SBGL’s outperformance over the past few months has been truly extraordinary, as major stocks in this sector normally tend to be directionally aligned – click to enlarge.

When we discussed HMY in early December, one point we were trying to get across was that its terrible technical performance just prior to the turn in late November was clearly out of tune with a quite obvious change in the fundamental picture. In this particular case, the technicality of year-end tax loss selling was likely the main factor that led to a temporary mispricing of the stock – something that has happened several times already. This created an interesting opportunity.

However, no such explanation is available for other laggards in the sector which have made new lows in January. In the meantime it has occurred to us that market participants are apparently simply ignoring positive fundamental developments in a number of cases and are still punishing companies for mistakes that their managers have made years ago. Ironically, most of these companies are actually run by different managers these days.

We also suspect that due to large outflows from gold, resp. resource focused funds and ETFs, a great many positions have been mindlessly liquidated irrespective of anyone’s “opinions”. Quite possibly a number of these funds happened to be overweight in names that have been under pressure of late and underweight in those that have begun to rally.

This brings us to the particular laggard we want to discuss today, senior Canadian gold producer Kinross (KGC). Note here that we are proceeding from the assumption that regardless of upcoming short term gyrations in the gold price, gold won’t fall out of bed completely anymore, i.e., we are assuming that the gold price will manage to stay above its most recent lows.

Spot gold daily over the past year. We are proceeding from the assumption that the support area indicated above is going to hold, or at least won’t be violated significantly this year – click to enlarge.

With gold in USD terms close to its descending 200-day moving average just before the release of the US payrolls report, a correction certainly wouldn’t surprise us. We would however also point out that if gold manages to ignore a strong payrolls report again (as it did last time) and continues to exhibit strength, it would have to be taken as a signal that the market’s character has changed significantly.

We believe the chances that gold will remain above its 2015 lows are quite good. Moreover, since we have no crystal ball, we want to focus on the company’s fundamentals based on ceteris paribus conditions. Obviously, a falling gold price would worsen its fundamental outlook and a rising one would brighten it.

Kinross Gold is Worth a Close Look

As we have noted on Monday, technically Kinross (KGC) looks pretty awful. It is a terrible laggard within the sector. Regarding the company’s fundamentals, we only know what everybody else who cares to take a look knows as well. We have no insights beyond the publicly available information. It is therefore certainly possible that the market knows something we don’t.

However, we don’t think so. Usually, the market “knows” very little. If that were not the case, great buying or selling opportunities would never emerge, but they do emerge with unwavering regularity. So instead of blindly following the old saw that “the market is always right”, one should from time to time allow for the fact that the market can be completely wrong, especially near turning points. After all, what did the market “know” when HMY traded at 52 cents in late November? Evidently, nothing – it even ignored glaringly obvious developments (such as the surging Rand gold price). Here is what KGC’s daily chart looks like: