Gold is no longer all that glisters
Even in an age of uncertainty price is falling
THE past few weeks have been a headache for gold miners, with bullion taking one knock after another. Is it losing its safehaven status despite increasing uncertainty globally?
After the US Federal Reserve this week left interest rates unchanged, the gold price dropped as much as 2% and South African gold stocks followed.
The JSE’s gold-mining index declined by 2.5%, led by falls in AngloGold Ashanti, Gold Fields, and Sibanye.
The Fed said although there was slow growth in the US economy, inflation was close to its 2% goal and the unemployment rate was consistent with its maximum-employment mandate.
Analysts expect the Fed to raise interest rates next month with another increase possible before the end of the year.
This means investors are unlikely to see gold as a good investment.
But Makwe Masilela, an analyst at BP Bernstein, begs to differ. He said although the probability of the Fed raising interest rates would exert pressure on the gold price, investors would still look to the metal as a safe haven because elections in France, Italy and the UK might result in major policy shifts.
Relaxing tensions between the US and North Korea also knocked the gold price.
“For now, we are happy that the North Korea issue is settled down, but if it does come back, it will be negative for gold,” said Masilela.
Izak van Niekerk, an analyst at Mergence Investment Managers, said although geopolitical tensions did influence the gold price, it might benefit in the short term if, for example, the outcome of the French election was viewed as negative for the European Union’s future.
Van Niekerk said “it would be highly speculative to use any one variable as a way to sustainably forecast the gold price as none [on their own] are reliable predictors for a long time period”.
Gold was less attractive because US bonds were yielding positive real rates, he said.
Peter Major, an analyst at Cadiz Corporate Solutions, said all the bets that had increased the gold price were starting to come off, such as people being fearful of US President Donald Trump’s policies.
He agreed with Van Niekerk that geopolitical events would spark only short-term movements in the gold price, but said it would drop in any case because it was trading at double its long-term average price.
With an increase in interest rates comes a strengthening of the dollar and a weaker rand. Will this make South Africa the best place to mine gold in 2017?
Major did not think so, due to the country’s domestic issues, including resolving the mining charter dispute, politics, the economy and “thousands of pieces of anti-mining legislation and policies”.
“With a weak rand it means the economy is not doing well. That’s no reason to invest here — it buys them [gold miners] a little bit of time, that’s all,” said Major.
A weak rand bodes well for miners, who reached their bottom in 2015. Last year mining companies returned a lot of cash to their businesses, reporting double, triple and quadruple growth in earnings.
The rand is about 2% stronger this year, while the gold price has gained 6.7%.
The share price of Harmony Gold, which has the largest exposure to the rand and last year decided to hedge a fifth of its gold production for two years – equal to about 432 000 ounces — gained 102% last year alone.
However, with a recent momentary strengthening of the rand, Harmony has been hardest hit, dipping 6%.
Given the yields from Harmony, Masilela said because of how volatile the gold price was expected to be for the rest of the year, companies could hedge a portion of their gold “for the sense of creating certainty”.