BRIAN KANTOR: Gold, the not so barbarous relic, is holding its own against JSE returns

We woke on Wednesday to gold at more than $4,000/oz. That’s nearly R70,000.

First thing — do make sure those Krugerrands are still in a safe place. The recent surge in the gold price has seen R100 invested in gold coins in 2000 increase in value by about 32 times, a gain equal to the same R100 invested in the JSE all share index if dividends were reinvested.

It is a close-run affair, yet a near triumph of the pessimists, who are always anxious about the wealth destructive influence of governments. By now they may have found even greater solace in their crypto, which is perhaps more safely stored.

The impact on the revenue lines of SA gold producers, which produce about 100,000kg of gold a year, will be significant, not only for the miners but also for the SA Revenue Service. Wednesday’s gold price of about R69,349/oz was about 58% higher than the average gold price realised in 2024 (and would be worth close to R700bn on the producers’ top revenue line if present rand prices were sustained for a year).

For the dollar investor it has been less of a contest. The dollar value of gold — $284/oz in January 2000 — has increased 13.6 times since then compared with the S&P 500 index, with dividends compounding, which is now up a mere 7.8 times. It should be recognised that the S&P offered little gain in 2000-12 but has surged since, helped over the past five years by the increased value of the most technologically advanced companies, the so-called Magnificent Seven.   

Yet the Mag 7 and the old-fashioned miners have something in common. That is, the dependence of their share prices and market value on the expected growth in their revenues. When companies included in the Mag 7 are being valued at many times their current earnings, expected future performance is far more important than past performance.

The future will depend on generating revenue from the vast scale of spending on R&D and capital expenditure being invested to power up their IT offering. Realising top line growth is all-important if spending is to be successfully monetised.

There is one important difference. The top line of a mining company is fully transparent. The daily gold or platinum price translates directly into revenue and operating profits — unless the operating models are subject to immediate restructuring, which is unlikely. With the Mag 7 and aspirant producers of chips, and all else that goes into data centres and is drawn from them, the top line is only revealed with a lag. That is, until the next quarterly report. You just have to wait and see.

Companies that surprise the market with extraordinary improvements in their share prices and market value need two essential ingredients. First, excellent returns or better still surprisingly improved returns on the shareholders capital they allocate. Second, the opportunity to scale up their operations and top lines, investing more capital to take advantage of the high returns realised.

What will have been surprising improvements in underlying metal prices will meet the revenue objectives of mining companies. And how they respond to the expected long-term growth opportunity with capex or acquisitions will add or subtract from the market value of production.

The problem with most SA economy-facing companies — retailers, banks and distributors, for example — is the absence of the opportunity to grow revenues. Their top lines are largely stagnant. So, unsurprisingly, are their operating surpluses. The nonfinancial corporations included in the SA Reserve Bank’s estimates of gross value added and GDP have been growing their top lines, operating profits and incomes after tax at little more than the rate prices in general have been rising since 2010. Growth has been realised at an annual average rate of 6%-7% in current prices, or about 1% in real terms.

The companies included by the Bank in its tables account for nearly 60% of the economy, 65% of the operating surpluses of all companies, 74% of all savings made and 62% of all capex. Despite slow growth in sales and profits they are not in any obvious distress, according to key ratios, and realise acceptable returns on capital invested. They simply lack the growth opportunity.

As I have often argued, they need more benign neglect from government and more TLC from the Bank. 

• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.