A pot of gold at the end of markets storm

TWO weeks since the Brexit vote, and the world is still an uncertain place. Britain has been hit by a crisis of leadership after the resignations of Prime Minister David Cameron and UK Independent Party leader Nigel Farage, while Brexit’s champion, Boris Johnson, has also faded from the scene.

In the rest of Europe, Italy is on the verge of a banking crisis after some of its banks’ loans soured.

Within this gloomy and uncertain Brexit environment, the price of gold, currently at a two-year high, is showing some glimmer of hope.

In the first quarter of this year, gold rose about 17%, and in dollar terms is up by just under 30% for the year to date, becoming one of the bestperforming global assets that investors hold.

Gold is considered a safe haven because it cannot be manipulated by the interest rate policies of any central bank. It also does not carry intervention risk.

Gold is also used as a hedge against inflation. Inflation is a fundamental driver of gold; therefore, if gold is an inflation hedge, in the long run the returns of gold and inflation should be similar.

So, as global markets collapsed after the Brexit vote, investors sought shelter in safe-haven assets such as gold and government bonds. Global 10-year yields are at a record low, with the US 10-year reaching an all-time low of 1.3682%.

There has been an element of irrationality in the way gold has traded this year, but many are attributing its rise to the loss of confidence in the credibility of developed market central banks.

We are likely to see strong and sustained inflows into the gold market, driven by the uncertainty that global markets face. Apart from uncertainty, gold is supported by monetary policy actions. Central banks in developed countries are easing again and will probably be forced to implement supportive measures such as delayed rate hikes or even rate cuts.

The Fed may leave rates unchanged this year. In fact, a rate cut in the US next year is highly probable. The futures markets are pricing in only a 5.9% probability of a rate hike for both the September and November Fed meetings, and a 17.8% chance in December.

The less sanguine trend in real GDP growth in the US and, in particular, the disappointing job numbers, make it difficult to see how the Fed can raise rates without putting the economy at risk.

Should the Fed stay put, the dollar may weaken, which will lead to a high dollar gold price.

The rand strengthened against most major currencies on the back of calmer markets and better-than-expected trade data a week after Brexit, but the risk-off sentiment has led to further rand weakness.

South Africa’s trade balance in May surged to a record R18.7-billion, significantly above market expectations. This was due to a surge in

The Fed may leave rates unchanged this year. In fact, a rate cut in the US next year is highly probable

exports, which expanded 14% month on month, combined with a decline in imports of 6.5%. Precious metals exports accelerated by an astonishing 51.2% year on year, due to better commodity prices and a weak currency.

While gold is a clear winner in the aftermath of Brexit, industrial metals, which fell in price, could see some support from central bank easing. I believe that South Africa’s current-account deficit could narrow sharply this year — and I also hope that the global demand for South Africa’s precious metals and minerals continues.

Leoka is an economist at Argon Asset Management