Gold breaks the R1m/kg barrier

In late March, as global fears around the Covid-19 pandemic reached fever pitch, gold for the first time ever punched through the R1m a kilogram price level.

Though trading below its 2012 peak of $1,772.25 an ounce in dollar terms, the collapse of the rand means the price of the metal has doubled in local currency since that dollar-high eight years ago.

The price action will support the theory of gold’s value as a store of wealth in times of crisis.

While a study of price volatility over the past 50 years supports that hypothesis over long periods, it also shows long stretches of price dormancy when the metal lost its shine among investors.

A kilogram of gold will easily fit in the palm of your hand — a standard bar (about the same size as an iPhone 8), measures 117mm by 53mm and is 8.7mm thick.

The biggest problem for the SA economy is that much of our remaining reserves are too difficult, dangerous and, as the highest-cost producer in the world, too expensive to reach.

The industry that mines the stuff is a shadow of its former self and the regulatory environment that governs it, barely supportive.

This is partly why listed SA gold miners have proved such poor long-term investments over time — even though if you do manage to catch the upswings, you stand to make, well, a mint.

As AngloGold Ashanti finalises the sale of its last SA assets to Harmony Gold, it’s hard to believe that on the day Nelson Mandela walked free from prison, 22 of the top 40 companies on the JSE were gold miners.

Still, investors who hold Krugerrands or the Absa NewGold ETF are enjoying solid protection against currency devaluation as SA stares into the abyss of a potential depression, induced by a lockdown aimed at protecting its citizens against the calamitous health consequences of an uncontrollable spread of Covid-19.

At peak production, SA was delivering 62% of the world’s mined gold to markets. In 1970, with the gold standard still in place, the country produced about 1,000t or just over 32-million ounces of the metal for the princely sum of $35.96 an ounce, which due to the exchange rate (in those days it cost just 70c to buy a dollar) meant we were achieving about R27 an ounce or R955 a kilogram.

We first hit R1,000 a kilogram in April 1971. The price of the metal doubled to R2,000 a kilogram in less than two years and again in just over one year, so by March 1974, as US president Richard Nixon was fighting for his political life in the midst of a global oil crisis, gold was trading at about R4,000 a kilogram.

It would take another five years for it to double again — to R8,000 a kilogram by May 1979 on mounting Middle East tensions, which culminated in the Iran hostage crisis in November that year.

The price of the metal would triple in a matter of months and briefly spiked to R24,000 a kilogram on January 18. It cemented the metal’s status as a hedge not only against inflation, but as a safe haven in times of crisis.

But that spike was short-lived.

In fact, by the time Mandela was sworn in as SA’s first democratically elected president, gold was at R50,000 a kilogram.

Gold bulls look at long-term pricing.

In a world of quarterly returns, however, equity investors have little patience for an asset that delivers no dividends and is purely dependent on supply and demand factors for its price. Following every spike, it tends to retreat quickly as soon as a particular crisis dissipates.

For example, it took seven years after the 1994 elections to double again, but most of that increase happened in the second half of 2001 as the dot-com bubble burst, sending the price from R80,000 a kilogram to R120,000 a kilogram.

Then Alan Greenspan cut US interest rates, money was cheap around the world and there was a surge in property and equity prices. Gold truly lost its lustre to practically every other asset class, and would hit R200,000 a kilogram only in December 2007.

“The golden years,” says David Shapiro, deputy chair at Sasfin Securities, “were between 2005 and 2011 when it went from $430 to $1,870 — it’s been tracking sideways since then.”

But, he adds, “there are a lot of gold bulls emerging. They are worried that cash will become worthless with the Fed printing money and rates at zero.”

Financial adviser Warren Ingram, a director at Galileo Capital, warns against barrelling into gold at this point: “I think gold, especially in the form of an ETF, can play a role as an insurance against catastrophe. Like all great insurance, you should buy it before the catastrophe and not in the middle of a crisis. Gold generally peaks in price at the worst time of a crisis when fear is greatest.”

Peter Major, head of mining at Cadiz Corporate Solutions, admits he’s put three shorts on the gold price since it hit R1m a kilogram — and has lost money each time.

“It will revert to the mean at some point,” he says, “but the problem for South Africans trying to short the metal is the weakness in the rand. If you want to be long on gold, this is the place to do it.”

He’s shorting SA gold shares at current levels too.

Sadly, SA barely ranks on global tables as a producer anymore.

From producing almost two-thirds of the world’s supply in 1970, output had fallen to below 6% by 2012 when we produced 154t at an average price of $1,668.89 an ounce.

In 2018, the last year for which we have data, we mined only 132t — less than 1% of global production.

The industry employs fewer than 100,000 people, less than a quarter of its 1970 labour force of 416,846.

In 1980, all mining made up 21% of SA’s GDP; by 2019, that had fallen to about 7%.

Now, with the lockdown, gold mining, as it still exists, has been virtually shut and only surface material is being treated.

Minerals Council SA chief economist Henk Langenhoven says: “There are plenty of reserves left, but with current technology coupled with massive domestic cost increases like electricity tariffs, they are not viable to mine.”

Still, he says, “the latest spike in the gold price has, of course, created a lot of headroom between production costs, of which ours are the highest in the world, and selling prices”.

Since 1994 the industry has, in fact, enjoyed only two years of expansion: in 2002 and in 2013.

Coal, meanwhile, contributed 25% of mineral sales last year, fractionally more than the platinum group metals.

But, given its value, gold still makes up a significant 14% of SA mineral sales.