Gold prices have been rising strongly but opinion is divided over whether this is a new bull run for the metal’s price volatility.
By James Dunn
Looking around the world, there is no shortage of geopolitical and macro-economic issues for investors to worry about, among them the US-China trade conflict, protests in Hong Kong, the looming possibility of Britain leaving the European Union without an agreement, a swelling mountain of global debt and the prospect of a global economic downturn.
Traditionally, when there is, or expected trouble of this kind, investors turn to gold for its age-old reputation as a store of value in uncertain times. Arguably, that relationship does not always hold true, but in 2019, it has come through in a big way.
Normally, nervous investors can also look to the bond market or the US dollar as safe haven options, but prevailing low interest rates – and with US$17 trillion worth of bonds around the world now offering negative yields – the bond market is not a great option, so, for many, the choice is between the US dollar and gold.
Why gold prices are rising
These factors – added to increasing central bank buying, particularly from Eastern Europe and Asia – have helped to drive the price of gold 20 per cent higher in 2019, to a six-year high of US$1500 an ounce.
“There is certainly a lot going in gold’s favour at the moment,” says Daniel Hynes, senior commodity strategist at ANZ Bank.
Hynes says the gold price has benefitted from a “perfect storm” of safe haven buying related to trade war concerns, central banks easing rates and a dramatic fall in bond yields.
On price charts, gold is “looking quite fragile,” Hynes says, and could be vulnerable to a pullback in the shorter term, particularly if some of the geopolitical and macro-economic worries ease.
“On a relatively longer timeframe, say more than three to six months, I still think there is plenty left in this rally, because the fundamentals behind it are structurally sound. I get a feeling that this is the first phase of a structural upturn in gold prices.”
Will gold prices rise further?
Some observers predict that the metal’s previous record high of US$1917.90 an ounce in August 2011 may again be within reach: in August 2019, US investment bank Citigroup said gold could easily achieve US$2000.
“The chance of an unbridled rally up to US$1800 is not out of the question, but it is going to be a two-steps-forward, one-step-back type of market,” Hynes says. “Gold is a headline-driven market at the moment, and it could definitely reverse if, for example, trade talks between the US and China were announced.”
Investors looking to participate in gold’s rally have several choices: gold bullion and gold coins, exchange-traded funds (ETFs) or exchange-traded products (ETPs) that offer a listed security that tracks the gold price and shares in gold mining companies and explorers.
The high gold price is a fillip for the Australian gold mining industry, which posted record annual production of 321 tonnes (10.3 million ounces) in the 2018-2019 financial year, according to gold mining consultant Surbiton Associates.
“The US dollar gold price is one half of the story for Australian gold miners and the Australian and US dollar exchange rate is the other half,” says Surbiton Associates director Dr Sandra Close.
“Most of the costs for Australian producers are in Australian dollars. They have some costs in US dollars, if they have borrowed in that currency, but on the whole, their costs are in Australian dollars. So, for some, their margins in Australian dollars are quite healthy at present.”
Close says the Australian dollar’s downward trend in recent years – falling from a peak of $US1.10 in July 2011, losing parity in mid-2013, to current levels in the high 60s in US cents – has delivered “quite high” local currency gold prices: gold has fetched more than A$1400 an ounce for most of the last decade.
“That has meant that more investors are interested in gold, there is more exploration and more focus on the industry, and over time, production has risen,” she says.
However, Close stresses that it is not always the case that production rises in response to higher prices.
Miners can use peak pricing periods to ramp up the mining of lower grade ore – or push lower grade stockpiles through the processing plant.
“What sometimes happens is, if the price goes up enough, less gold is produced in some operations, depending on their flexibility. Some of them have more options in terms of what they can mine,” she says.
“Mining is a continuous, long-term, process of optimisation, and if they use high-price periods to mine their lower-grade material, they’re actually increasing the life of their mine – and in the end, they will have got more gold out.”
It cannot be generalised that all Australian gold miners are in “profit clover” with the high Australian dollar gold price, Close adds.
There are always companies with cash costs near or even above the actual gold price, even when that price is high.
Some companies may be cash flow-positive in one quarter, but not the next; for example, they might cut back in one quarter, which means they’re stripping ore off, but not getting as much out, or they have had processing problems.
Overall, while the industry is strong, the simple fact is that investors can’t generalise across every mine and every company, Close warns.