Should investors be going for gold?

The government’s plan is logical on paper: Get the mining sector operating again and a substantial part of the secondary and tertiary sectors that supply it will also be kicked into motion.

It makes perfect sense given the centrality of the resources sector to the economy as an employer, taxpayer, and earner of foreign exchange. According to data supplied by the Minerals Councils of South Africa’s chief economist, Henk Langehoven, SA’s mining industry spent R22.6bn in 2018 procuring goods and services that included items such as R1.8bn worth of wholesale and retail goods, catering and accommodation.

In practice, however, the government’s plan to gradually emerge from the five-week lockdown is proving complex, and fraught. Miscommunication, poorly framed amendments to lockdown regulations, and the sheer trickiness of marshalling roughly half of the 450 000 people the industry employs back to work – the government has targeted 50{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} mining production by 30 April – is proving a logistical tribulation.

Firstly, the amended lockdown regulations asper government’s 16 April announcement on the extended lockdown confused almost everyone in the mining sector.“What does that mean, people or tonnes?”asked Richard Spoor, an attorney who represents the Association of Mineworkers and Construction Union (Amcu), of government’s 50{e93887a69cdd95d753f466db084bbc3aa0067124675315461d28d68a72842cc2} production target.

Spoor also asked minister of energy and mineral resources, Gwede Mantashe, to couch additional guidelines in terms of the Mine and Health Amendment Act. That’s because miners face Covid-19 breakouts once operations restart. The last thing the sector needs is nebulous and ad-hoc direction.

It’s true that mining companies are extensively equipped, and have experience, in dealing with disease as evidenced in the sector’s rollout of HIV/Aids treatment, as well as screening and testing for tuberculosis.More recently, the sector set down plans to tackle the compensation of silicosis sufferers who contracted the disease on the mines.

But Covid-19 is calling for a level of organisation that is particularly burdensome to the chain of mining industry logistics. Screening and then testing of employees before entering the ‘cages’ intended to take them underground might only be a process of a few seconds per miner, but in a shift of hundreds it could result in significantly longer lead times.

Even before mining companies can send miners underground, there’s the incredibly significant job of getting them back to the mine premises. This requires a recall of miners from labour-sending areas, some of which are in jurisdictions that have independent lockdown rules such as Lesotho, Zimbabwe, and Mozambique.

“You’ve got to get the right crews in, screen employees before new medical certificates can be issued and complete refresher programmes before new licences can be issued to operate,” said one industry source.“

Our estimation is that it would take almost a week to ensure that mining employees have got their medical certificates and have been refreshed,” he said. Impala Platinum (Implats) has estimated it will take a month before mines can ramp-up to production.It wasn’t counting on the arrest of Mark Munroe, the head of Implats’ Rustenburg mines.

Charged with breaking lockdown rules after issuing a letter to 6 000 employees asking them to assemble for work, Munroe’s arrest is what happens in the absence of joined-up thinking.

In a galaxy far away

Far beyond the mine gate, in a distant galaxy known as the global financial system, forces are combining to make gold mining an enormously profitable endeavour.

In fact, analysts believe the seeds have been sown for a long-term bull market for gold. The macro outlook for the global economy is murky at best, at least for the next quarter amid bruising economic data reports and evolving economic fallout containment policies.

These policies include the injection of liquidity by central banks, which has the effect of diluting the value of currencies. Set against zero interest on borrowing, a scenario for world markets could be one of low growth followed by high inflation. This is like sunshine and rain for the gold price.

“As long as markets stay orderly, we think this environment should continue to be very constructive for both gold and silver,” said JP Morgan Cazenove analysts in a recent report. The bank sees gold trading higher to between $1 800 and $1 850 per ounce on a spot basis around the middle of the year.

“If you want a bull case for gold, look no further than this chart,” said Tyler Parrent, director of institutional equity trading at RBC Capital Markets, pointing to an almost vertical increase in US money supply. “While the US government might be downplaying potential inflation, this growth is staggering,” he said.

This new money began with the pre- Easter $2.3tr ‘bazooka’ issued by the US Federal Reserve aimed at keeping the financial system soupy, even as investors liquidated assets, even gold to some extent.

$2 000 an ounce?

There’s no escaping the economic impact of Covid-19, however; only amelioration. According to Ole Hansen, head of commodity strategy at Saxo Bank, dollar gold’s current value of about $1 700 an ounce is a temporary resting place before marching higher.

Some think higher: Newmont Mining CEO Tom Palmer, and Edward Morse, global head of commodities at Citi Research, told Bloomberg News in separate interviews that gold could test $2 000 an ounce in the next two years.

“The level of stimulus currently going into the global economy is likely to support gold over the coming years with yield curve controls likely to push real yields deeper into negative territory,” said Saxo Bank’s Hansen.

Following the ‘bazooka’, yield curve controls are a different tactic being adopted by the US Fed in which it focuses on achieving a targeted level for interest rates by intervening in debt markets.

This is done partly by buying government bonds and differs from the bazooka – or quantitative easing – which was about increasing the stock of money in the economy.The common aim of both, however, is to soften the blow of global recession.

The way some economists describe it has positively blood-curdling effects: 2020 could be potentially worse than the Great Depression about 90 years ago. Only India and China are expected to end 2020 with positive GDP growth numbers.

Given the weakness in the rand, a function of the recent downgrade of SA’s credit rating as well as broad macroeconomic forces brought about by Covid-19, this makes for some handsome pickings for the gold price received by SA gold mining firms.

“I would agree that the outlook is very supportive given the economic slowdown facing the world and the amount of liquidity that has been injected into the global economy recently,” said James Wellsted, a spokesperson for Sibanye-Stillwater.

“This is good for the dollar gold price and for the SA gold producers who have the added benefit of a weak rand, which has pushed the rand gold price to unprecedented heights,” said Wellsted.

At the time of writing, the rand gold price was at a record of R1.08m per kilogram.The rand gold price was R530 000/kg when Sibanye- Stillwater listed in Johannesburg in 2013.

During the global financial crisis of 2008 and 2009, gold started its three- year run-up to the intraday high of $2 000 an ounce of August 2011 in October 2008 – four months before the bottom of the market which occurred in February 2009, said Rene´ Hochreiter, an analyst for Noah Capital.

“What could happen this time? The warp speed of markets today may see a shorter period, maybe two years. The case for a $2 500 an ounce gold price by end-2020 with a range of $2 000 to $3 000 in 2021,” he said in a note.

Maybe. Only that gold price forecasts are almost always wrong, especially enthusiastic ones. JP Morgan, for instance, sees the gold price moderating again in 2021 as the world economy rebounds.

“If you look at the gold price, there are grounds for optimism, yes,” said Stewart Bailey, spokesperson for AngloGold Ashanti, which runs the world’s deepest gold mine, Mponeng. “But right now, there are a lot of unknowns out there – here in SA and across the globe – so the immediate focus is ensuring our business and our communities remain resilient through the end of this crisis, and beyond.”

This article originally appeared in the 7 May edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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