The recent turmoil in financial markets has led to an increased demand for 'safe haven' instruments such as gold and government debt. The impact of this can clearly be seen in the gold mining sector, where there has been a 33 per cent increase in the price of an ounce of gold and an 80 per cent increase in the FTSE Gold Mines index in the last three months.
We have analysed directors' dealings in the gold mining sector in the run up to these movements. Our methodology screens directors' trades to identify those discretionary purchases which are likely to be the result of an investment decision, as opposed to a director acquiring shares, for example, as a result of a bonus paid in stock.
Directors of gold mining companies dealt shrewdly in 2008, selling stock when company valuations were at their highest in the first half of the year and taking advantage of depressed valuations in the second half to aggressively buy stock prior to the recent rally in the sector.
In the first half, when the FTSE Gold Mines index was on average 42 per cent higher than the second half, directors were net sellers of their own stock. They sold to a value of £3.4m and made discretionary purchases of £0.5m resulting in a buy to sell ratio of 0.15:1. There were 14 purchases made, with an average purchase value of £32,000. So directors were correctly anticipating the subsequent fall in company share prices and decided to lock in their capital gains.
In the second half, there was a marked decline in the FTSE Gold Mines index. Directors used this opportunity to buy stock, making discretionary purchases of £10.5m and selling to a value of £3m, resulting in a buy to sell ratio of 3.5:1. There were a total of 62 purchases made and the average purchase value increased to £169,000. Directors bought most aggressively in the fourth quarter when the FTSE Gold Mines index was at it lowest, purchasing £8.5m and selling just £130,000, resulting in a buy to sell ratio of 65:1. If recent trading activity is anything to go by, directors still seem to think that the sector is undervalued and have made discretionary purchases of £1.1m so far this year at a buy to sell ratio of 3.4:1.
Examples of recent discretionary purchases include those made by Peter Hambro of Peter Hambro Mining who bought £85,000 of stock on 13 November, Mark Caruso of Allied Gold who bought £90,000 of stock on 14 November and Christopher Coleman of Randgold Resources who bought £33,000 of stock on 26 November. The share prices of these companies have since increased in value by 206 per cent, 136 per cent and 50 per cent respectively.
