Gold price gets bullish

Last week gold futures rose above $1 800 per ounce. This is the first time they have passed that figure since 2011. The price of the precious metal is up over 17% this year in dollar terms. It is therefore not surprising that five of the six best-performing stocks on the JSE for the first six months of 2020 were gold stocks – DRDGold, Pan African Resources, Goldfields, AngloGold Ashanti and Harmony.

It is worth remembering that the gold price fell along with everything else in the Covid-19 crash. In the 10 days following 9 March, it dropped 12.5%.

However, along with global stock markets, gold troughed on 19 March. From that point it has gained over 21%.

“When investors are fearful and there is a lot of uncertainty, they flock to safe-haven assets,” said Etienne Roux, equity analyst at Truffle Asset Management. “Usually that means US bonds at zero risk, or gold.”

Since gold stocks are leveraged to the gold price, their share prices have shot up well ahead of the gains in the metal.

DRDGold was up an astonishing 259.3% in the first half of the year.

Harmony, the laggard of the five largest gainers, was up 40.4% in these six months.

However, there are some other fund managers that are sounding a word of caution.

“We find investment demand [for gold] almost impossible to predict other than to posit that it has some momentum to it,” said Mandi Dungwa, portfolio manager at Kagiso Asset Management. “Higher prices from increased demand create more demand and may lead to higher prices still.”

This argument notes that there are no underlying fundamentals to this kind of rise in the price of gold. It goes up because there is more investment demand, which means that it will fall when sentiment shifts and that demand dissipates.

“‘Conventional wisdom’ suggests gold is a useful inflation hedge, but there is little evidence for this other than in the unique period of the late ’70s,” said Dungwa. “Gold bulls, without any inflation, now argue gold outperforms when interest rates are low.

“Another argument is that it is an essential hedge against the large monetary stimulus experiment being undertaken by developed market central banks. However, we find little credence to these arguments.”

There is no doubt that investor appetite for gold soars in times of economic turmoil. In the great financial crisis, the gold price went from around $800 per ounce at the start of 2008 to a peak of $1 921 in 2011.

Some analysts present this as evidence that gold is a hedge against the market distortions caused by quantitative easing (QE). That argument only goes so far, because most of the QE implemented after the great financial crisis was never unwound, yet the gold price almost halved back to $1 057 per ounce in 2015.

For Dungwa, there are also more efficient and predictable ways of getting protection in the market. “If the argument is that gold is insurance against asset price falls, then we would rather buy contractual insurance through a put option or the VIX [Volatility Index],” she said.

This article was first published on Citywire South Africa, and is republished with permission.