Is the rising gold price a self-fulfilling prophecy?

There’s little evidence that gold is in fact a useful inflation hedge – Mandi Dungwa, Kagiso Asset Management.
The belief that gold has benefit in times of crisis means that it does, at least in the short term. Image: Akos Stiller, Bloomberg

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 March 9, it dropped 12.5%.

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


This is an indication of investor demand. Physical gold-backed exchange-traded funds (ETFs) have seen huge inflows in recent months, hitting a high of $1.7 billion in one day in June.

“When investors are fearful and there is a lot of uncertainty, they flock to safe-haven assets,” says 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.

Funds overweight gold shares have clearly benefited from this run. 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,” says 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. It also suggests that there is no inherent benefit to holding the metal at times of uncertainty.

“‘Conventional wisdom’ suggests that gold is a useful inflation hedge, but there is little evidence for this other than in the unique period of the late 1970s,” says Dungwa. “Gold bulls, without any inflation around, currently argue that gold outperforms when real 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, however, 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 towards the end of 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 says. “If we are going to utilise our portfolio’s risk budget on a strong view that asset prices will fall, we would prefer to be guaranteed a payout in the event that it happens.

“In terms of gold being a protection against negative real interest rates – at what price level does gold pay out? The gold price is up 17% year to date. Is this enough, relative to changes in real interest rates?”

The exposure to South African gold miners in the Kagiso Equity Alpha fund is therefore limited to the indirect exposure it has to Harmony through its small position in African Rainbow Minerals.


The question for investors is whether any of this matters. Even if gold has no inherent benefit in times of crisis, the broad belief that it does turns it into something of a self-fulfilling prophecy. At least in the short term.

For Roux, therefore, gold stocks are attractive in an environment such as this. The Truffle SCI General Equity fund is overweight local miners, with AngloGold Ashanti and Sibanye Stillwater both in its top 10 holdings.

“We think there is a good correlation between gold prices and real interest rates,” he says. “What we are currently seeing is a huge reduction in interest rates, and QE putting money into the system. That is pushing real rates down, and that is supportive of gold.”

The metal has also become increasingly attractive relative to US bonds.

“The difference between the two is that bonds should pay you an income, whereas gold doesn’t,” said Roux.

“But as yields have reduced, the opportunity cost of holding gold versus bonds also reduces.

“Bonds are also linked to a currency that could devalue, whereas gold is a hard asset,” says Roux. “Over a very long time it keeps its value.”

That doesn’t mean that Roux has a view on where the gold price may peak. He is happy to just take the position that, for now at least, it’s an attractive place to invest.

“We just think the current environment is supportive for gold, so we think it’s prudent to have some,” says Roux. “But where the gold price is going, I would rather not want to speculate.”

Patrick Cairns is South Africa editor at Citywire, which provides insight and information for professional investors globally.

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


Sort by:
  • Oldest first
  • Newest first
  • Top voted

You must be signed in and an Insider Gold subscriber to comment.


The writer of this article needs to have their bran checked. Go calculate how many breads you could buy with an ounce of gold over time and how much bread you can buy with an ounce of gold today. I will help you, in 2015 the average price of white bread was about R 10 and gold was trading at about R 13 500 in July of 2015, which means one ounce bought you 1350 breads. Today white bread is about R 15 and gold is trading at around R 32 000, which means you can buy 2133 breads. The further back in history you go the worse it gets. There were times in our history, long long ago, that you could get less than 10 breads with an ounce of gold. Don’t come here and tell me gold is not a hedge against inflation.

An once bought 2 big oxen 100 years ago. Same today.

@Mmm….your comment devoid of logic

On a bell curve basis, oxen might be the outlier and been an unusual performer – however, that still doesn’t diminish golds very healthy rise in value over the same period

The undeniable reality is take any general basket case of goodies over time, and gold has outshone ALL of them !!

Cattle has been used in Africa for centuries to store wealth. Other cultures use Gold outcome is similar.

Or maybe the real cost of bread has got less?

High Gold Price = High Probability of a Stock Market Crash, Recession.
Low Gold Price = Stock Markets are Fire (Bull Market).
High Oil Price = Economies are at their Peak.
Low Oil Price = Economies are at their Low, Recession.

Usual anti gold rubbish.
Consider the utility of holding bullion for a Venezuelan or Zimbabwean or Argentinian. And soon a South African. Gold in ZAR up 1490% in 20 years. 111% in 5 years. 55% in 1 year. 38% in year. 7% in 1 month. Only a complete idiot would not hold 5 to 10% of their net worth in gold. will show you the performance in all currencies. It’s going to be like 2001 again.

USDAU is meaningful in the US, but every time the gold price rises in USD the rand strengthens making the real value of AU less meaningful.

Gold was never intended to be an investment in the same way as dollar cash or rand is not an investment. Gold is an alternative form of cash. Investors go into cash when they don’t see any opportunities in shares or bonds. Gold is the ultimate form of cash because it is the only currency that fulfils alls the function of money, namely a store of value, medium of exchange and unit of account. When the inflation-adjusted interest rates are negative, it implies that there is a cost to holding depreciating fiat currency.

The price of gold will keep on rising for as long as real interest rates are negative, and real interest rates will stay negative for the next decade. Lockdown destroyed the demand side and the supply side of the economy. This is a recipe for stagflation and a repeat of the situation we experienced during the decade between 1970 and 1980. The Dow Jones Industrial Index crashed by more than 94% in terms of gold during that decade, while the index traded sideways in terms of the depreciating dollar. The DJI crashed by “only” 88% in terms of gold during the Great Depression and by “only” 86% during the Great Financial Crisis. Most investors are unaware of the fact that the destruction of asset value during the period of the 70s stagflation, was more severe than during the Great Depression. The destruction of value was hidden from investors because they used the corrupted unit of account, the fiat dollar.

That situation will repeat itself over the next decade. The most fundamental decision any investment manager can make, the most crucial and basic decision that is the foundation of all other investment decisions, is when to be in cash(gold) and when to own shares. The opportunity cost of money can give you a nasty kick in the ribs here.

Seems Kagiso Asset management does not understand risk.
Gold shares or as a commodity adds diversification to a portfolio.
The reliance on contractual insurance they speak about is foolish. The entity they take out the protection insurance with might not survive and they will be left with a loss after having paid for protection.

Yep … portfolio managers like to slice ‘n dice with all sorts of mathematical wizardry and derivatives until they get shorted by a super-trader with a nano-second computer system running in New York.

Refer to the 1998 collapse of LTCM.

The author struggles with justifying a negative view on gold for any financial purpose. Central Banks should screen prospective decision-maker recruits for affliction with such outdated and dangerous myopia.
PS Markets have suffered from Central Bank manipulative collusion since the Great Banking Fraud crisis (incorrectly disguised as the Great Financial crisis). Gold was a clear and obvious target in the fight for stock market investment, which is still fraudulently purported to be essential for economic recovery. The entire debacle has seen its true purpose of the wealth transfer create a few undeserving gangster trillionairs at the devastating expense of the rest. Now gold is into the most powerful phase of its first supercycle whilst the megalomania of the Bilderberg-inspired gangsters makes them too busy with their grabbing for their objective of new world control to notice these minor reversals of their criminal command-and-control funding endeavours.

@Gargoyl….spot on !!!

The manipulated stock market is on its last legs as CB’s go all out in their final orgy of QE money printing, while the elite cleverly use this cheap toilet paper fiat to buy back shares and artificially inflate stocks in a perverted self perpetuating feedback loop that has no basis on fundamentals to their benefit

But its a race to the bottom, as eventually every party has its hangover

When the time is right, they will pull the carpet from under the feet of everyone, and its the man on the street that generally bears the brunt

Then rinse. Repeat

Absolutely. And it is all thumping on the ground where we all sit whilst our indoctrinated brethren pretend to be numb and thereby nonchalant.

In the 1970’s interest rates were high and the US$ gold price was rising. Commentators noted that interest rates were high because inflation was high. Gold was rising as it is a hedge against inflation.

Fast forward to 2020. We are told that gold is rising because interest rates are falling. Gold is protection against negative interest rates. Why would anyone need protection? put the cash in the safe and wait a few years to get rich.

We are also told that gold is not a hedge against inflation. In 1968 the POG was about R30/oz. Currently it is about R30000. This means that the Rand has been debased by 1000x in 52 years. Yet gold is no hedge against inflation.

You can’t make this stuff up.

The above article does not understand that QE in the USA does not cause inflation. Let me reiterate: when the Fed buys bonds, it does not do so directly from the Treasury. It has to buy them from auctions called “open market transactions”. Speculators know the Fed has to come to the market to “feed” (pump up the money supply) and they “front run” the Fed. They buy from the treasury and sell at a profit. Newly created money simply goes right back into the bond market. This raises the prices of bonds and thus lowers interest rates. Mission accomplished for the Fed and the bond speculators.

Q: where does the wealth accumulated by the bond speculator come from?

A: The bit that is lost is the capital destruction. Falling interest rates raise the retirement value of bonds. This process transfers industrial capital to the pockets of bond speculators. This causes deflation aka wealth destruction. The more money the Fed creates the more the bond market will siphon off and the more the burden of debt increases.

Friedman argued that inflation was everywhere a monetary phenomenon. This is only half the truth. QTM is flawed as QE demonstrated. The velocity of money is another critical dimension. People spend money fast when they realise it is being debased fast. Central banks can control the money supply but not the velocity. This is why QE failed.

Smart people realise that there are ominous clouds on the horizon. If the world suffers hyperinflation or a capital-destroying deflationary debt collapse, gold will still hold its value.

I dont like gold and would rather not have it. As an investment option its sh…ite.
But, and I hate admitting gold fans have a point, it is probably the only genuinely viable hedge against the entire economy imploding.

‘’Nowadays to be intelligible is to be found out’’
Oscar Wilde

Eish man – what a shocking statement by Kagiso – just look at its intrinsic value!
The biggest mistake I made in my life is not to have bought at least 1 Fine Oz of gold (Krugerrand) in my working life, instead of contributing towards a pension fund!

Please quote RE1 level compliance numbers when making statements like this. Your customers will need it!

Just buy the physical –not the Gold shares as you end up buying some of the worst management in the world!

…. not to have bought at least 1 Fine Oz of gold (Krugerrand)per month ….

Abso bloody lutely. I bought 5 Kruger Rands at the same time as a very “reputable” broker advised me to buy R5 000 of Grootvlei shares, maybe around 1982 or so. I don’t have to tell you which have done better and which I should have kept buying!

Also, don’t tell anyone but I was told (sic) you can put the KR’s into your wallet and travel just about anywhere without comment. I have not tried this.

Price of a 1 Ounce Kruger rand in 1970 around ZAR 29.- . Now – 50 years later you need to cough up around ZAR 32 500.- to get one. The ounce is still the same , but the ZAR has become toilet paper. Value of the currency = share price of the country.

This Kagiso article really ‘’irked’’ me. I will have to get over it….

I refuse to accept that this type of ‘’jargon’’ should be believed as no amount of sophisticated statistical analysis is a match for the historical experience that happened (Gold’s intrinsic value etc.)
My view is that the writer of this article is trying to convince us that the failure to understand the context in which correlations (products) are observed leads to false conclusions.

Fortunately, the market is never wrong and it encouraged the players’ additional ways of thinking that made investment crises more predictable and probable.

I’m no believer in ‘’forecasting’’ hence my view that there are too many of these types of forecasters trying to sell their contrarian views and products – by pretending that they forecast.

Financial markets analysts are all playing around with their “black box models” (algorithmic models) and forecasts – they con people into thinking its possible, and helpful, to assign mathematical probabilities to events, and then to price risk accordingly.
The best and most accurate prediction that was ever made, was done by Edmond Halley. He in 1705 predicted that the three comets that appeared in 1531, 1607 and 1682 were in fact one single comet which returns periodically every 76 years – it did in 1758, some 16 years after his death!

Try Elliott Wave Analysis before your own expiry, although it is increasingly obfuscated in its intended arena by illegitimate CB collusive dishonesty.

During my FX trading life – I mainly traded with the support of technical analysis – Old school stuff like ”sensitive” for short term and ”non-sensitive” for longer-term – point and figure charts, coupled with RSI and momentum charts.

100 and 200-day moving averages supported also supported my views!

There is no market, not since 2008 and probably not for the last 20yrs…..fundamentals just do not matter anymore. TSLA anyone. No asset manager will advocate gold as there is no money in it for them. End of.

Lots of wisdom here in the comments.

Historically, all fiat currencies, without exception, have eventually reached their intrinsic value, which is zero.

This is what gold protects against.

The USD, Euro, ZAR etc will not be the exception, I can guarantee that 100%.

The titanic battle between the fiat currency printers and gold just gets more intense in a crisis, like now. Gold Was once used to back up Fiat Currencies, but now nothing is backing up fiat currencies. Nothing.

people confuse price value and utility.

In 2000, solar panels were VERY expensive, probably $20 per Watt. today solar panels are $0.24 per Watt. the kWh of energy produced by a solar panel then or now has remained roughly equal in value – you need the same number of kWh to boil your water for tea now as in 2000.

Gold is not a safe haven! Equities are more stable – heck, Amazon shares are more stable.

Gold has a very limited utility value, mainly in semiconductors. Each year, 15 times more gold is produced than is needed by industry. Half goes to jewellery – a vanity marketing scam. A third is bought by investors / speculators. A tenth is bought by deluded central bankers – maybe ones that only have negative yield alternatives to buy.

Gold generates no cashflow – it costs money to store.

Scarcity is a myth. Gold is NOT scarce, it is abundant. It is only scarce to extract at a low price. Buying gold is basically like betting that it will get more expensive to extract in the future. Original DaVinci art is scarce, perfectly round beach pebbles with red stars are scarce.

Gold is not an investment with any intrinsic value nor any major utility value, generates no cashflow and is not scarce.

But let me guess – you like Bitcoin?

What trade are you in – you sound like a Fund Manager?


Me, Fun Damager???? Hell, that is a reportable insult!

Bitcoin : no I call bitcoin Digital Kubus.

My investments are direct in own biz, offshore direct a handful of equities, and cash.

I thought I understood where bonds fit in a portfolio but figured that in a perfect market the yield and price would correct to negate what each other did, so why bother unless you can find massively under-priced bonds due to an externality like many safe bonds went through in 2008.

I am currently aimless being cash and only one equity. If somebody has an intelligent idea for dollars please shout because this is getting frustrating.

@Johan-Buys…..utter rubbish!

Your lack of understanding Gold as a self standing entity by comparing it to equities, not as an inflation hedge [ and you are totally incorrect about its scarcity ] etc etc exposes this ignorance of yours.

And your understanding of Bitcoin, like most other Boomers, is like trying to explain the internet to one’s grandmother in 1993.

I am willing to wager a decent bet you are above the age of 55 or so ???

End of comments.




Instrument Details  

You do not have any portfolios, please create one here.
You do not have an alert portfolio, please create one here.

Follow us:

Search Articles:
Click a Company: