For our clients who have been with us for a few years, many would have remembered our weekly notes on gold prices and markets. With the breakout behaviour of gold recently, and by popular demand, we’ve decided to bring it back – here’s Nuggets!As we write the gold spot price has reached new all-time highs of $2,330/oz (ZAR43,476/oz), and in nominal terms in a number of currencies too. This breakout that started in March followed a period of nearly three months of narrow-range trading, largely bounded by $2,000 and $2,090/oz. Usually when any asset trades in a horizontal range for a sustained period, pressure builds up and it eventually breaks up or down, often dramatically, as was the case here.
In Rand terms, we’ve seen a more sustained upward march from about R36,000/oz a year ago, to today’s R43,000 – a handsome return of almost 20% for South African gold owners – in Dollar terms, around 15%. To put this into perspective, the JSE Top 40 index has declined 3.26% in that same time – a 23% returns swing.The question for gold investors really is, what’s driving this meteoric rise, and can this trend continue?
Markets are not buying the narrative that America’s economy will see a soft landing, with inflation returning to 2%, and incoming rate cuts. Rather, America’s surge in money printing over the Covid years has resulted in a bad fiscal situation i.e. too much debt.
The smart money investors betting that higher inflation is here to stay, and hence betting on a steady decline in the Dollar.
Extreme uncertainty around the world in terms of future government policy as more than 50 countries will hold regional or national elections this year.
Geopolitics have worsened, with the Ukraine-Russia and Israel-Hamas wars pitting the Western world against the East, as well as a China/Taiwan scuffle. Tensions continue to rise, and with no one showing a willingness to back down, the risk of it spilling over into a larger conflict increases.
Sovereign debt levels have skyrocketed since the Covid lockdowns, weighing down on growth and opening the door for defaults or more quantitative easing (printing).
The weakness in the Chinese property market – due to its scale, it can have systemic ramifications if it collapses.
Increased risk in small to medium banks in the U.S and Europe, as regional banks and savings and loan companies are seen selling off credit risk exposures recently to hedge funds in a synthetic note – similar to what was seen before the 2008 crisis.
Russia, China and the Gulf states actively reducing their Dollar holdings and settling trades amongst BRICS nations in other currencies.
Sustained central bank gold purchases in tonnes from both small and large nations, indicating the big boys are mitigating risk and/or sanctions risks with gold reserves.
Pundits suggest that the continued rise is somewhat puzzling, as the recent jump has created more supply than demand in Western markets as holders have tried to take profits at these prices. So, in the short-term, one would expect or have expected to see a healthy consolidation in the price.
But we haven’t seen that, so on the other hand, pundits make the case that gold has sustainably changed range upward – similar to what happened in 2005 when prices left the $400 mark forever – and that the tailwinds continue to outstrip the headwinds.
So maybe the world is betting on gold for one of the oldest reasons, a sense that all the central bank shenanigans won’t rein in inflation over the longer term, and that it makes sense now more than ever, to stack up on something that has a solid track record of maintaining its value in real terms.
