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Has the gold stallion bolted?

Not by a long shot. Even Bank of America puts it at $3 000 an ounce in 18 months.
There are various ways to back the metal. Image: Andrey Rudakov, Bloomberg

You may have noticed some astonishing sprints in gold stocks in the last month. DRDGold is up 70% since the start of the year. Gold Fields and AngloGold Ashanti are up nearly 50%, and Harmony is up a third.

All this while financial and industrial shares are looking increasingly priced for disaster. People are panicked and rushing for the safety of gold – and with good reason.

The gold share rally happened in the teeth of the Covid-19 lockdown, when production was shut down. The latest price spurt coincided with the announcement that deep level mines will be able to operate at 50% capacity. It will take four to six weeks for shuttered mines to get to this level of production, a feat complicated by the intricacies of maintaining social distancing and sanitary conditions underground.

Last week Bank of America raised its projections for gold to $3 000 (R55 600) per ounce within 18 months, which is 50% above the previous high of $1 921 (R35 600) set in 2012. The bullish outlook for gold is based on central banks’ commitment to virtually endless monetary expansion to prop up economies brought to their knees by the Covid-19 pandemic.

Alasdair Macleod of Goldmoney takes a more adventurous view, arguing in a recent article that fiat currencies are headed for the dumpster, which leaves just gold and silver (and possibly bitcoin) as the only remnants of sound money left standing. He says infinite money printing by central banks to rescue their economies from the current collapse will accelerate the demise of fiat.“History, economic theory and even common sense tell us governments and their central banks will rapidly destroy their currencies.”

Even the US dollar will struggle to retain its status as global reserve currency as foreigners start to ditch US dollar-denominated investments.

To understand why local gold stocks performed so spectacularly while production was shut down, you have to look at the rand price of gold.

The weak rand is the key culprit here, but as local mining costs are primarily priced in the local currency, and with fuel prices dropping, this provides an extra kick to local stock prices as mines recommence operations.

Rand price of gold

Source: ShareMagic

SA used to be the gold capital of the world, but the number of pure gold plays can now be counted on one hand. To get a broader exposure to gold stocks you have to look abroad at companies like Newmont, Barrick Gold, Kinross and Franco-Nevada, all of which are expected to deliver strong earnings growth in 2020.

Investment research house Zacks rates all of these as buys, despite strong recent gains, based on earnings growth forecasts for 2020 of 51% for Barrick Gold, 41.2% for Kinross and 15.9% for Franco-Nevada. These are considered by Zacks as the stocks most likely to double in 2020.

One way you can accumulate some of these shares is by opening an account with Mexem, a SA-based low-cost brokerage which allows you to trade stocks in more than 120 markets around the world.

AngloGold Ashanti

Source: ShareMagic

How to invest in gold

There are three primary ways to invest in gold:

  1. Buy the physical metal
  2. Buy shares
  3. Buy exchange-traded funds (ETFs) such as Investec Gold and Standard Bank Linker.

You can own physical gold in the form of Krugerrands or minted bars of various sizes, but this poses the challenge of safely storing it. However SA Bullion offers secret vaulting facilities both in SA and abroad.

The advantage of buying Krugerrands (stick with the ‘bullion’ coins, not the ‘proof’ ones) is they are considered legal tender and so do not attract Vat.

Hilton Davies, founder of SA Bullion, says demand for physical gold is reaching almost unprecedented levels due to fears of economic collapse and the devaluation of paper currencies: “The rand has devalued against the US dollar by 7% a year for the last two decades, and many people understand that owning physical gold is one of the best ways to hedge against this.

“We source our gold from Rand Refinery and, more recently, from overseas suppliers which we’ve had to do to keep up with demand.”

While Krugerrands of various sizes make up much of the demand, buyers are also looking for minted bars to be vaulted in secure (and secret) locations both locally and abroad.

Owning gold shares in SA comes with its own risks. Peter Major, director of mining at Mergence Corporate Solutions, says he thinks gold has run up a little too high and will likely fall a bit , with the rand likely to strengthen somewhat.

“Hence, I am shorting SA gold shares at the moment and am marginally in the money,” he says.

Davies says owning physical gold has advantages over shares, even though it pays no dividend or interest.

“I’m worried about SA gold mines. They are businesses and their margins can vary wildly. Our gold mines in SA are deep level with very high labour and operating costs, and of course now they are allowed to operate only at reduced capacity. The higher rand price of gold has certainly helped them over the last few months, but they remain quite speculative. Owning physical gold may be less exciting, but I would say the prospects for good returns over the next few years are excellent.”

As a final note, it is worth pondering the latest move up in bitcoin, which touched $9 000 (R166 337) this week. The run-up in price was attributed to central bank money printing programmes, and a process known as ‘halving’ – a technical event where fewer new coins are released onto the market, thereby constricting supply.

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Hilton Davies, founder of SA Bullion, says demand for physical gold is reaching almost unprecedented levels due to fears of economic collapse and the devaluation of paper currencies. You cannot buy gold bullion at all the normal places and the gold basis is busy collapsing from over 15% on the 9th April to about 3% now. This is very bullish for gold. People are losing faith in paper gold and gold is going into hiding. There are more than 20Oz of paper gold for each Oz of physical. Those who are manipulating the price lower are losing the battle. Oddly enough gold bullion will offer the least return. Gold majors fare better but the best returns will be on the highly leveraged juniors where ten baggers will be commonplace. Unfortunately in South Africa the ANC has killed mining exploration and junior miners. The cost of capital is prohibitive. In Australia, there are gold juniors aplenty on the ASX. These guys are gonna fly.

If you cannot buy Physical #gold, your ONLY alternative is #bitcoin (spoiler alert – it has outperformed all assets from Jan and #Gold from forever).

That will be a frosty Friday when the western economies let the gold price runaway high. That will never happen. Even if the US Dollar weakens and recession / depression sets in the value of gold will always be managed and in a serious recession will decline in value along with everything else.

That’s a dangerous view when you see all the world is facing now. The risk of being wrong could mean you loose everything. Having even 10% in gold is a cautious hedge that could save losses in other investments if we end up in a global train wreck which is looking more and more likely!

Gold is the safe haven for the man in the street and is a hedge against loss of confidence in Govt and Central Banks. We are starting to get there where the man in the street starts realizing the emperor has no clothes… Govt is clueless and central banks are powerless to stop the collapse. Property, commodities and precious metals are will be where you want to be when SA starts defaulting on its loans (especially $ dominated) .The rand is still going to weaken substantially…. so rand hedge or offshore is also wise.

For us, every spare ZAR will continue to be exchanged for AU;
Standard operating procedure for over 5 years now.

Smart money is flooding into gold & crypto.

End of comments.

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