Should You Buy St Barbara Ltd at this Share Price?

What happened to the Santa Barbara Ltd share price?

the St Barbara Ltd [ASX:SBM] share price picked up another 2.35% in today’s trading. The broader Aussie market was marginally up after some reflation in commodity prices overnight. Year-to-date, SBM has picked up more than 50% in gains, vastly outperforming some of the other stocks in the Aussie stock universe.

Why did SBM shares do this?

SBM is a gold producer, so its stellar performance should not come as any surprise to investors. If you don’t know what I just referred to, then you should take a look at the performances of all gold producers in 2016 so far.

Gold producers have been able to track the dramatic rise in gold price, amplifying the price increase in the precious metal several fold. There is no denying it, SBM is a momentum stock, and it makes complete sense for momentum traders to include it in an active trading position.

The question is: ‘how high will gold go?’ The answer lies in two key factors concerning gold. One is its long term correlation with the commodity basket; the second relates to the short term inverse relationship between gold and the stock market.

One can argue that the commodity basket has reached a bottom of sorts. That means it is likely to reflate over time, which supports the price of gold over the long term. On the other hand, renewed volatility in the stock market can greatly boost the performance of gold and gold-related stocks. The harder question here is, ‘has gold gone too high?’

What now for Santa Barbara Ltd?

For the momentum traders, it almost does not matter what the fundamentals say. If the stock is on a run, then that’s enough reason to include it temporarily. For the fundamental investors out there, the question is more complicated.

I argue that gold is, in fact, too high at the current price, due to the inflows in the first quarter. It can suffer a setback, or at least a flat period. However, there is no rule to prevent the stock market from creating volatility again, which means there is leg in the momentum of gold. That can only prolong the gain of gold and the eventual settling down of its price.

In the long term, there is support for the precious metal. This means I am bullish on gold over the long term, but very cautious on it in the short term.

Ken Wangdong
Emerging Market Analyst, New Frontier Investor

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