Gold has had a good few years, with post-Covid inflation fears triggering a rally in 2021 and a wave of central bank buying taking the price even higher during 2022 and 2023.
But a fresh rally in recent weeks has taken the metal into uncharted territory. Gold had been hovering at about $2,000 an ounce. It started climbing in March, gaining more than 8% in dollar terms during the month. And it has kept going. Just in the past week, the gold price has gained 4% to hit a record high of more than $2,400 on Friday. In rand terms, the gold price is now more than R45,000/oz, up about a quarter on its level of a year ago.
The speed of the climb surprised many in the market, partly because it seemed a bit counter to macroeconomic fundamentals. Unlike other financial assets, gold earns no income for investors and it has a paradoxical relationship with the macro landscape. When inflation is rising and threatens to get out of control, the gold price tends to gain. But when central banks, particularly the US Federal Reserve, react to inflation by raising interest rates and keeping them high, it tends to be bad for gold, which can’t compete with the high yields on offer in the money market. With the Fed making it clear in recent weeks that it will not cut rates nearly as fast or as far as markets expected, one might have expected gold to come off the boil.
Biggest driver
Instead, it has heated up. The biggest driver has been geopolitical. Gold is the safe haven metal investors turn to when the world is an uncertain and scary place. Rising tensions in the Middle East have fed into gold’s safe haven status. That has been the case, particularly last week, with the regional conflict threatening to escalate into a much wider war.
Macroeconomic factors haven’t been absent either: higher-than-expected US inflation has raised fears of a global economic “stagflation” scenario of continued high inflation and low growth. Gold is also the subject of complicated speculative flows, competing, for example, with bitcoin, and those flows seem lately to have been in its favour.
More fundamentally, the gold price continues to be underpinned by sustained strong demand from the world’s central banks. Emerging-market central banks have been particularly avid buyers of gold since early 2022, when Russia invaded Ukraine. The war itself heightened geopolitical tensions and inflation worries. But the sanctions put in place by the US and Europe, specifically the freeze on Russia’s foreign reserves, were as material.
They came as a reminder of how much of their assets most central banks hold in dollar or euro financial assets, and how vulnerable those could be to sanctions — in ways that physical gold holdings are not. Most emerging markets, China included, held relatively little gold as part of their foreign reserves.
Added to that have been the tensions between the US and China, the rise of the Brics and the growing calls for “dedollarisation”. Central bank demand, at almost a quarter of total gold demand, was the big driver of higher demand for gold in 2022 and 2023 and that continues.
The latest gold price rally is unlikely to last, but the fundamentals for the metal remain strong. That should be good for SA. Other commodity prices have fallen but gold has shot the lights out, especially in rand terms. And while SA is no longer the world’s top gold producer, the industry still employs more than 95,000 people directly and supports many more indirectly. And it still makes a sizeable contribution to SA’s exports and its public purse.
Tragically, SA’s gold miners have been unable to take much advantage of the high gold price due to the high costs and constraints on production. Our gold mines are very deep and often old. They rely heavily on electricity, which makes up a big chunk of their input costs. The record load-shedding of the past year or two has weighed heavily on gold output. So too has the cost of electricity, not to mention the costs and risks of crime and corruption targeting the industry.
It’s a bitter irony that while the gold price is reaching record highs, some of our large gold miners must restructure to remain sustainable. SA needs to do much more to make sure miners can make the most of high global prices when they are gifted to us.
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