GOLD industry bulls need not be too disappointed the metal has dropped below $4,000 per ounce. According to industry analysts and producer CEOs, the case for gold remains as strong as ever.
They cite two reasons. Firstly, downward pressure on gold is what you’d expect from any viable asset class: liquidity. “I’d say ... gold has performed its role as a liquid asset. It was trading at all-time highs, positioning was elevated, and it allowed investors to access liquidity,” said Suki Cooper, global head, commodities research at Standard Chartered.
Cooper was referring to bouts of gold price ‘weakness’ earlier this year (it’s worth remembering that gold is 99% stronger over three years). Speaking at the FT Mining Summit in October, Cooper added: “I think gold has held up remarkably well. It’s at the same level as it was a year ago. And a year ago, the market was pricing in for the Fed to cut twice in the next 12 months.”
According to Reuters, gold hit its lowest level in more than a year as oil prices climbed, a function of the US failure to strike a peace deal with Iran. It has spurred fears of higher inflation and elevated interest rates. Markets see an 89% chance of a 25-basis-point rate hike in December, the newswire said, citing CME’s FedWatch tool.
The second factor is that the fundamental reasons gold prices climbed over the last three years are still intact. Peter Marrone, CEO of Allied Gold, a West African miner, says gold is compensating for factors that extend well beyond Fed rate increases. “I don’t think gold does well because we’re in an inflationary period or because of a geopolitical conflict.
“It does well in a financial crisis when there’s systemic uncertainty,” he said, referring to an estimated $43 trillion in US government debt. “It just seems to me that we’re on the cusp of a very significant financial event, certainly,” he added.
Of course, Marrone would say that. His words echo those of Ian Cockerill, CEO of another West African gold miner, Endeavour Mining. For him, the so-called debasement trade, which was a popular phrase last year, is as relevant today. He said at the summit: “There’s active movement towards de-dollarisation.
“The macro environment is that people are losing faith in fiat currencies, central banks are looking for gold and they are asking, ‘How do I protect the value of my currency?’ That, I believe, is a very, very strong driver.”
“Our view on gold is a relatively simple one: the price of gold is an output of the problems of the world,” said Evy Hambro, global head of thematic and sector investing at BlackRock, the asset manager. “When you look around the world today, you see the incredible amount of debt governments are carrying and the large deficits many countries continue to run. You see no plan from governments to fix those problems other than doing more and more of the same,” he said.
“To me, that means you’re going to see a continuing depreciation in the purchasing power of paper currencies, and the outcome is that real assets rise in price. Gold is probably one of the biggest beneficiaries of that.
“So my personal view is that we’ll continue to see real asset prices rise as paper currency values decline, and gold is going to be front and centre. That’s the bigger picture driving the trend.”
Interestingly, gold mining equities have held up relatively well during the last six months, during which time the gold price has fallen 17%. AngloGold Ashanti is 2.5% lower over the same period; Newmont is 5% lower while Harmony Gold is only 10% down, demonstrating its rand hedge benefits perhaps. Elsewhere, there seem to be buying opportunities: shares in Pan African Resources are 27% lower.
These are still elevated prices for gold producers, which are generating decent margins provided costs continue to be contained (though mining inflation is inevitable). “Speaking as producers, we’re generating impressive margins, costs remain contained, and we’re generating very strong margins at $4,000 to $4,500 an ounce,” Marrone said last month.