GOLD WINS AS BREXIT, TRADE WARS LOOM

GOLD WINS AS BREXIT, TRADE WARS LOOM

In just over three months, the gold price has gone up more than 15% from $1 300 to over $1 500. Two major factors caused this jump.

  • World markets were rocked by US President Donald Trump’s tweets, especially regarding the trade war with China. As any second-year economics student knows, there are no winners in a trade war. The uncertainty caused investors and central banks to flee to gold as a safe haven, and the US dollar weakened.
  • The US Federal Reserve became more dovish, indicating it would lower interest rates – which is usually good for the gold price.

The World Gold Council recently released its gold demand trends report. Central banks bought 224t of gold in Q2 2019 – an increase of 47% year on year. This pushed H1 buying to 374t, the largest net half-year increase in gold reserves in 19 years of data collected.

Holdings of gold-backed exchange-traded funds (ETFs) grew 67t in Q2 to a six-year high of 2 548t. The growth in demand was biggest in Europe where Brexit drove European central banks to buy gold. For investors, negative bond yields also fuelled the demand for gold. ETF holdings in Europe grew by 87t over the first half-year, with 67t of that growth occurring in Q2. In North America outflows of 60t in April and May reversed in June with inflows of 65t.

The hefty increase in the price of gold caused a 2% increase in mine production and a 9% increase in recycled gold.

When considering an investment in gold, consider investing in a gold ETF like Newgold on the JSE. Christiaan Bothma, an analyst in the Sanlam Private Wealth investment team, showed how the rand price of gold outperformed gold mines over a long period. See http://1of1privatecollection.co.za/investments/metal-vs-mine-which-is-the-better-investment/.

When looking at the performance of the rand gold price against that of two of the oldest gold companies in South Africa (excluding AngloGold since it was unbundled from Anglo American only in 1998), the yellow metal far outperformed the miners. As can be seen on the chart below, if you’d invested R100 in Harmony Gold in 1990 (dividends reinvested), this would be worth a mere R182 today (2.1% per year). An investment of R100 in Gold Fields would have left you with R387 a share (4.7% per year), while R100 in Rand Gold would have yielded R2 194 (11.4% annualised, 5% per year from the dollar gold price and 6% per year from the depreciation of the rand/dollar exchange rate).

Unless the factors driving investors and central banks to buy gold, change, the gold price is likely to continue to increase. In the aftermath of the global financial crisis the gold price more than doubled from less than $900 to $1 800. How likely is it that the UK will decide to stay in the European Union, and Donald Trump will surrender in the fight he picked with China? In this kind of turmoil involving the US, the US dollar is not such a safe haven. Interest rates are in a downward trend. A portion of gold ETFs in a portfolio is therefore quite prudent.

Gerhard Lampen

Head Sanlam iTrade.

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