Yellow Peril

South Africa: Why Gold has not risen more on Coronavirus

By David Whitehouse

Posted on March 13, 2020 07:29

 © A worker cleans gold bars at South Africa’s Gold Fields South Deep mine in Westonaria south-west of Johannesburg. REUTERS/Siphiwe Sibeko
A worker cleans gold bars at South Africa’s Gold Fields South Deep mine in Westonaria south-west of Johannesburg. REUTERS/Siphiwe Sibeko

That means South African miners can’t count on any further help from prices to raise profitability.

“Gold tends to respond to systemic risk,” says Yann Alix, head of Ashurst Africa in London. “Some may argue that COVID-19 is not enough of a risk to show a real trend in predicting future gold prices.”

Investors in gold have at least been spared the pummelling endured by equity buyers in recent weeks.

But the flight to safety has favoured developed-country bonds rather than the yellow metal.

  • Gold prices ended March 11 at $1,660 per ounce, only marginally above their level of February 21.

Gaius King, a strategist at Janus Analysis in the UK, gives a different explanation. “If a fund needs to redeem, and there is precious little liquidity, then they will sell whatever.” That includes gold and blue-chip quality stocks, he says.

Holders of gold can take their pick, then: either coronavirus has prompted such panic that the metal has been offloaded along with everything else, or the crisis is not sufficiently systemic to encourage gold buyers.

Either way, it’s hard to see a catalyst that would drive gold much higher. Those seeking safety should go for developed-country bonds. Investors who think the impact of coronavirus is being exaggerated should logically buy equities.

Falling Jewellery Demand

King see declining jewellery demand in China and India as a structural factor weakening gold’s prospects.

  • China, the world’s largest jewellery market, is consuming 28% less gold than in the peak year of 2013, he says.
  • Jewelry demand in India, predominately used for dowries, has dropped over the last decade, he says, while total bar and coin demand in India has fallen 52%.

Gold as a metal has outperformed in the crisis, but investors in South African gold miners have suffered along with everyone else. Since February 24, the FTSE/JSE gold mining index has fallen from 16% to 2,970.

  • “Stocks in gold mining companies do not appear to be responding to rises in the price of gold as well as they did in the past,” Alix says.
  • “This may be because the industry is currently facing challenges including the difficulty of finding new mines, as well as political and environmental opposition,” he says.
  • King points to the high cost base of South African operations. Witwatersrand, the world’s most important source of gold supply in the 20th century, remains “unionised and non-mechanised,” he says.

Having visited the Witwatersrand mines, King says that reducing costs is “a big ask”.  South African operators can match the best in Canada and Australia for efficiency, but the technology that would drive down costs “does not yet exist.”  Despite estimates that half the world’s gold still exists in the region, the mines are “deep, hard … not anytime soon I suspect.”

According to Alix, one way to mine more cheaply would be to use renewable energy to power mines. On-site renewables could appeal to mines where grid or fuel access is difficult, expensive, or unreliable.

  • This could involve installing renewables on site at miners’ operations, leading to potential savings of up to 25% of their total electricity costs, he says.

Bottom Line: South Africa’s gold miners won’t get any help from the current stock market rout – renewable energy is the only obvious avenue to drive down costs.

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